Bryan Flynn's Central Massachusetts Mortgage Blog


The Fed Cut, Adjustable Rates Mortgages, and why this could help subprime loans

When the Fed cuts its short term over night rate it usually causes long term yields to increase, so the 30 and 15 year fixed rates tend to go up.  However, the adjustable rates which a majority are based off the the 6 month LIBOR (London Interbank Offered Rate) goes down as well.

How could this help those sub-prime loans?  These adjustable rate mortgages usually have a 2 or 3 year fixed period at a teaser rate, averaging 7 - 8% range .  Every 6 months after the fixed period the rate is adjusted.  The adjustable rate is made up of 2 components, the margin (fixed predetermined number based off their risk, 6% range for sub-prime) and the index, which is the LIBOR I discussed earlier that sits at roughly 2.4% right now)

 So if a loan is adjusting next month, it would now be in the 8.4% range, which still could be an increase over what people are paying now, but not a disastrous jump we saw just 6 months ago.  Most likely a minority of people will be could be saved at least for another 6 months, but anything helps these days.

 On the other hand, conforming adjustables could see a decrease in rates to a number lower than current 30 year fixed rates.  Most conforming margins are around 2.75% add the 2.4% LIBOR, they are adjusting to 5.15%, mostly like a decrease in their payment.....not too bad.


Comment balloon 2 commentsBryan Flynn • March 20 2008 07:16AM


it will however never decrease below their intial Rate. only the loans that have already adjusted may come down.
Posted by Christopher Hills, Managing Dir. Lending almost 13 years ago
Chris, you are right, I was not clear, on the sub-prime loans it does not go below the initial rate usually, on the conforming loans however it can come down below that initial rate....again depending on the program there is a limit to the decrease of the interest rate.
Posted by Bryan Flynn, Central Mass and Worcester Mortgages (Regency Mortgage Corporation) almost 13 years ago