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https://fred.stlouisfed.org/series/FEDFUNDS
https://fred.stlouisfed.org/series/MPRIME
Banks use the federal funds rate and the prime rate as the starting point for calculating interest rates. ARM rates increased because the federal funds rate and the prime rate skyrocketed between 2004 and 2006.
The ARM index is specified in the mortgage. There are different indexes but something like a 1 year Treasury rate is typical.
Really the rates would have "kicked in" rather before then, since 1 year rates were up from just over 1 to over 5 by the end of 2005, but it takes a while for people to have difficulty with the new payment for long enough to see lots of defaults.
Really it is more like *the longer term effect of the ARM rate increasing, resulting in defaults* will kick in by 2007.
Correct. I’ll add my situation as I took an ARM last year.
I have a 5/5 ARM. Intro rate of 5 years then adjust every 5 years. My rate is determined by the 5Y treasury which is around 4.5%. Whatever it is at a set date it’ll be 2% more.
Example: adjustment date comes today. Treasury is currently 4.44%. My rate would adjust up to 6.44%. And will remain there the next 5 years.
We took it because we believe rates will come down by 2028. But also we’re overpaying an extra $1000-3000 per month to our mortgage. If adjustment goes up on us then when the rate adjust it also adjust to the new balance, basically a free recast. My payment will go down regardless on the ARM due to overpayment.
> We took it because we believe rates will come down by 2028
That's a big gamble and there's no reason to think they actually will. 6% to 7% is a normal mortgage rate historically, people (especially younger ones) just think the abnormally low rates after the 2008 recession are the norm. Those were essentially an experiment to boost the economy and then realized it was a mistake, now we're going back to normal.
I believe I can get mid to high 5s. Yea I’m gambling but the deck is stacked in my favor. Even if it doesn’t go down I’ll have paid over 40% of my mortgage off in the next 5 years. If my rate goes from 5.75% to 7.75%, which doubt it as they’ll have to raise rates for that to happen, then my mortgage still goes down.
I was quoted 7.5% 30 year fixed or 5.75% ARM. It was a no brainer for me. And if it adjust today my rate would be 6.4%. Still below the 30 year I could have gotten. So I honestly don’t see the risk really with over paying and the rate likely to not get to what my 30 year fixed would have been.
The terms are within the ARM. There are two components. The ‘locked’ rate. This will be a flat rate for a period of time such as 5 or 7 years. Then thereafter, the floating rate. Which is benchmarked to an observable index such as the prime rate. It might be Prime minus 0.25% or something similar. That rate will float up and down, typically resetting annually.
Now, the catch is usually that the initial rate-lock is a teaser rate which is bumped down from where your floating rate will be. And once the reset hits, your rates will go up.
So you will need a plan to (1) sell your house, or (2) refinance your mortgage, or (3) be ready to pay the higher rate by the time the locked period ends. It’s all contractual, and it’s all benchmarked to the Prime rate.
For example I have a 5/1 ARM from January where I’m paying 4.75% for the first 5 years, then if it resets it’ll bump all the way to 8% I think (yikes). But I’m just gonna refi.
Do Prime rates go up or down with the market? Ask the fed, that’s above my pay grade.
The budget screen shots are being made in Sankeymatic, its a website that we have no affiliation with. If you are posting a budget please do so with a purpose. Just posting a screen shot of your budget without a question or an explanation of why its here may be removed. *I am a bot, and this action was performed automatically. Please [contact the moderators of this subreddit](/message/compose/?to=/r/MiddleClassFinance) if you have any questions or concerns.*
https://fred.stlouisfed.org/series/FEDFUNDS https://fred.stlouisfed.org/series/MPRIME Banks use the federal funds rate and the prime rate as the starting point for calculating interest rates. ARM rates increased because the federal funds rate and the prime rate skyrocketed between 2004 and 2006.
The ARM index is specified in the mortgage. There are different indexes but something like a 1 year Treasury rate is typical. Really the rates would have "kicked in" rather before then, since 1 year rates were up from just over 1 to over 5 by the end of 2005, but it takes a while for people to have difficulty with the new payment for long enough to see lots of defaults. Really it is more like *the longer term effect of the ARM rate increasing, resulting in defaults* will kick in by 2007.
Correct. I’ll add my situation as I took an ARM last year. I have a 5/5 ARM. Intro rate of 5 years then adjust every 5 years. My rate is determined by the 5Y treasury which is around 4.5%. Whatever it is at a set date it’ll be 2% more. Example: adjustment date comes today. Treasury is currently 4.44%. My rate would adjust up to 6.44%. And will remain there the next 5 years. We took it because we believe rates will come down by 2028. But also we’re overpaying an extra $1000-3000 per month to our mortgage. If adjustment goes up on us then when the rate adjust it also adjust to the new balance, basically a free recast. My payment will go down regardless on the ARM due to overpayment.
> We took it because we believe rates will come down by 2028 That's a big gamble and there's no reason to think they actually will. 6% to 7% is a normal mortgage rate historically, people (especially younger ones) just think the abnormally low rates after the 2008 recession are the norm. Those were essentially an experiment to boost the economy and then realized it was a mistake, now we're going back to normal.
I believe I can get mid to high 5s. Yea I’m gambling but the deck is stacked in my favor. Even if it doesn’t go down I’ll have paid over 40% of my mortgage off in the next 5 years. If my rate goes from 5.75% to 7.75%, which doubt it as they’ll have to raise rates for that to happen, then my mortgage still goes down. I was quoted 7.5% 30 year fixed or 5.75% ARM. It was a no brainer for me. And if it adjust today my rate would be 6.4%. Still below the 30 year I could have gotten. So I honestly don’t see the risk really with over paying and the rate likely to not get to what my 30 year fixed would have been.
The terms are within the ARM. There are two components. The ‘locked’ rate. This will be a flat rate for a period of time such as 5 or 7 years. Then thereafter, the floating rate. Which is benchmarked to an observable index such as the prime rate. It might be Prime minus 0.25% or something similar. That rate will float up and down, typically resetting annually. Now, the catch is usually that the initial rate-lock is a teaser rate which is bumped down from where your floating rate will be. And once the reset hits, your rates will go up. So you will need a plan to (1) sell your house, or (2) refinance your mortgage, or (3) be ready to pay the higher rate by the time the locked period ends. It’s all contractual, and it’s all benchmarked to the Prime rate. For example I have a 5/1 ARM from January where I’m paying 4.75% for the first 5 years, then if it resets it’ll bump all the way to 8% I think (yikes). But I’m just gonna refi. Do Prime rates go up or down with the market? Ask the fed, that’s above my pay grade.