Tag Archives: Bankrate

A Call to ARMs

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MainStreet.com quoted me in A Call to ARMs As Homeowners Opt for Lower Interest Rates. It opens,

Some homeowners are choosing adjustable rate mortgages instead of the traditional 30-year mortgages to take advantage of lower interest rates for several years.

The biggest benefit of an ARM is that they have lower interest rates than the more common 30-year fixed rate mortgage. Many ARMs are called a 5/1 or 7/1, which means that they are fixed at the introductory interest rate for five or seven years and then readjust every year after that, said David Reiss, a law professor at Brooklyn Law School. The new rate is based on an index, perhaps LIBOR, as well as a margin on top of that index.

The main disadvantage is that the rate is not fixed for as long as the interest rate of a 30-year fixed rate mortgage, but younger homeowners may not consider that a negative factor.

Younger Owners Should Consider ARMs

While many homeowners gravitate toward a 30-year mortgage, younger owners “should seriously consider getting an ARM if they think that they might move sooner rather than later,” he said. If you are single and buying a one-bedroom condo, it is likely you could enter into a long-term relationship and have kids.

The 30-year fixed mortgage rate is 3.50% as of April 7 while a 5/1 ARM is 2.83% as of April 7, according to Bankrate’s national survey of large lenders.

While ARMs expose the borrower to rising interest rates, they typically come with some protection. Interest rates often cannot rise more than a certain amount from year to year, and there is also typically a cap in the increase of interest rates over the life of the loan, said Reiss. During the height of the housing boom, lenders were originating 1/1 ARMs that reset after the first year, but now they reset frequently after the fifth and seventh year.

An ARM might have a two-point cap for one-year increases; that means, an introductory rate of 4% could only increase to 6% tops in the sixth year of a 5/1 ARM, Reiss said. That ARM might have a six-point cap over the life of the loan, which means a 4% introductory rate can go to no higher than 10% over the life of the loan.

Reiss on Myths of the Fed

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Bankrate.com quoted me in a story, 5 Myths Debunked About The Federal Reserve. it reads in part,

Assassination, foreign control and money printing: the stuff of a motion picture thriller?

Not in this case. They’re all the fodder for wild and surprisingly popular myths surrounding the nation’s central bank, the Federal Reserve.

It does wield considerable power, evident in the extraordinary measures taken during and after the financial crisis. But it’s amazing the things that otherwise reasonable people say about this admittedly complex U.S. government institution.

David Reiss, professor at the Brooklyn Law School, says, “To most of us, the Federal Reserve is a riddle, wrapped in a mystery inside an enigma, to borrow Winston Churchill’s phrase.”

With the Fed celebrating its centennial, the time is right to tackle some of these myths head-on. There are many myths out there regarding the Fed. Here are just a handful.

*     *     *

Myth 3: The Fed prints money

The notion is rooted in the Federal Reserve’s control of the nation’s money supply. The Bureau of Engraving and Printing, part of the U.S. Treasury, is responsible for printing currency.

“Although the Bureau of Printing and Engraving prints it, it delivers it to the Fed, and then the Fed gets to decide how much of it to put out into the economy,” says W. Michael Cox, director of the O’Neil Center for Global Markets and Freedom at Southern Methodist University’s Cox School of Business. He’s also former chief economist of the Federal Reserve Bank of Dallas.

In a way, Reiss of the Brooklyn Law School says, “the Fed can create money and does so in a variety of ways.” What he means is the Fed can increase the money supply through its monetary tools. Since the end of 2008, it has used “quantitative easing,” or QE, a term used to describe the Fed’s strategy to boost the supply of money. In the latest round of QE, the Fed has undertaken the monthly purchase of $85 billion in assets over the past year.

If you want to describe the process correctly, you might take a cue from St. Lawrence University’s Horwitz. The central bank isn’t in the printing business, but it has some control of the process.

“The money that the Fed creates is all done electronically in the form of bookkeeping entries that expand the deposit accounts that banks hold at the Fed,” he says.