Inflation is Everything in Mortgage Refinancing

By Jonathan Haeber
CMR Columnist

In past columns I've talked about the new Federal Reserve Chairman, Ben Bernanke. I happen to like the guy. He purports that he'll be more transparent when it comes to the Fed's intentions. Transparency is good, especially for those of us who have a lot to lose or gain based on Mr. Bernanke's decisions.

Here's a staggering statistic for you: According to real estate analyst Bob Chapman, 62% of California mortgages are ARMs. These types of exotic home mortgages are also dangerous to have in an inflationary economy. Why? Because the rate adjusts on an ARM loan. In times of inflation, Mr. Bernanke will likely raise the Fed's short-term rate. As a result the interest rates on exotic home loans will rise.

"Transparency" May Save Your Hide

What Mr. Bernanke says about being "transparent" could be a warning sign. He's letting you know that he will give you fair notice. He's counting on you to take the steps. What this means for people who have an adjustable home mortgage is that they need to start refinancing to a fixed rate, and refinancing fast.

I'm not really a big fan of numbers, but I don't mind Excel, so I tried a little experiment in comparing mortgage rates. I took the 35-year history, put those rates into a spreadsheet, and pulled out the average: 9.34%. Right now, the rates are hovering at about 6.5% and moving up fast. If history is any indicator, our rates could go as high as 17.6%, like they were in 1982.

Refinancing is Your Decision

I'm not necessarily saying that you should strongly consider refinancing to a fixed rate now. Some people plan on selling or moving out before the term of their ARM ends; some don't mind taking the risk. I do encourage you to listen to the words of Bernanke and keep an eye on the 10-year U.S. Treasury bonds. It could save you from an embarrassing foreclosure.

Source
Forcasts.org: 35-year History Comparing Mortgage Rates

About the Author
Jonathan Haeber is a marketing writer for Discovery Channel Stores. He recently purchased his first home, and took a self-taught crash course in home mortgages.

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