This article was originally published on ETFTrends.com.
Unless a buyer is flush with cash, most home purchasers will need to procure financing in order to get into the home of their dreams. The latest yield curve inversions, however, are showing up in mortgage rates—particularly adjustable-rate mortgages (ARMs).
ARMs will typically offer lower rates compared to fixed-rate mortgages for an initial period of time. After that time is up, the rate converts to an adjustable rate tied to a market index.
The latest yield curve inversion flashing from the bond markets is now revealing something that doesn’t traditionally happen in the mortgage market: ARMs are showing higher initial rates versus fixed-term mortgages.
“The averages you see on the site are based on what quotes have been posted to the site, so small and inconsistent sample size on the ARMs,” said Greg McBride, chief financial analyst at Bankrate.com. “Our weekly national survey on the other hand, does show what we’d expect to see – ARM rates lower than fixed. The gap isn’t big of course, as we’ve got a flat to inverted yield curve, but the traditional relationship holds.”
This, in turn, is souring the taste for ARMs when it comes to financing options for a potential home buyer.
“Longer-term rates (like the 30-year mortgage) are now equal to or lower than one-year rates (like the indexes used with most ARMs),” said Guy Cecala, publisher and CEO of Inside Mortgage Finance. “Bad time to get an ARM.”
From a mortgage-qualifying perspective, it puts buyers and mortgage providers in a bind with different requirements from both that can clash.
“Rates are all over the place. Some lenders want/need the variable cash flows to offset fixed-rate exposure,” said Matthew Graham, chief operating officer of Mortgage News Daily. “People want variable rates at the beginning of a Fed rate-cutting cycle, and lenders generally would prefer fixed rates of return when rates are declining.”
Mortgaging ETF Opportunities
Exchange-traded fund (ETF) investors who sense an opportunity on funds focused on mortgage-backed securities can look to the likes of the iShares MBS ETF (MBB) and the Vanguard Mortgage-Backed Secs ETF (VMBS) .
MBB seeks to track the investment results of the Bloomberg Barclays U.S. MBS Index. The index measures the performance of investment-grade mortgage-backed pass-through securities issued or guaranteed by U.S. government agencies.
VMBS seeks to track the performance of a market-weighted mortgage-backed securities index. The fund employs an indexing investment approach designed to track the performance of the Bloomberg Barclays U.S. MBS Float Adjusted Index.
This index covers U.S. agency mortgage-backed pass-through securities. To be included in the index, pool aggregates must have at least $250 million currently outstanding and a weighted average maturity of at least 1 year. All of the fund's investments will be selected through the sampling process, and under normal circumstances, at least 80% of the fund's assets will be invested in bonds included in the index.
For more market trends, visit ETF Trends.
POPULAR ARTICLES AND RESOURCES FROM ETFTRENDS.COM
- SPY ETF Quote
- VOO ETF Quote
- QQQ ETF Quote
- VTI ETF Quote
- JNUG ETF Quote
- Top 34 Gold ETFs
- Top 34 Oil ETFs
- Top 57 Financials ETFs
- Q&A With Barry Ritholtz on New WealthStack Conference
- ETF Flows Are Having A Great Year
- Trump Trade Comments Drive Market Lower
- FlexShares Debuts Quality Low Volatility ETF Suite on NYSE
- Can Libra Save Facebook?