• Tweet

• Tweet

As expected, the Federal Reserve raised the Fed funds rate another quarter point on Tuesday. This was the 12th time in a row that the Fed has raised short-term interest rates, which adjustable rate mortgages are tied to. That means the Prime rate is at 7%. Every time the Fed raises interest rates, rates for ARMs and home equity lines of credit (HELOCs) also increase.

Typically, short-term rates are well below long-term. The difference between the two is the yield curve. Recently, the Fed has increased short-term rates, but long-term rates have not followed suit. This is called a flattening of the yield curve. It means that long-term fixed-rate mortgages are more advantageous than short-term ARMs.

Quicken Loans’ CEO Dan Gilbert believes it’s important for homeowners to know how to manage their mortgages. “A lot of people today are ‘dis-ARMing’–they’re getting rid of their ARMs (in favor of) fixed rates because of the flattening yield curve,” he says. “I think it’s probably one of the most obvious plays. You have to be crazy to have an ARM when (the Fed) told you they’re going to raise rates two more times. It’s a management situation, just like your stocks and bonds.”

 Printer Friendly Version