Save On California Home Loan Mortgage Rates

The good news from the California mortgage market is that mortgage rates are down, making California home loans more affordable. However, some people may be wondering why only a fraction of the much-publicized cuts in Federal Reserve rates have shown up in California home loan mortgage rates. The answer is that those cuts have minimal impact on mortgage rates. So rather than waiting for further declines in California mortgage rates, home shoppers would do well to look for where the best savings on those rates can already be found. Naturally, shopping around is the first key to saving on a California home loan. In addition, the type of loans home buyers seek will be a key to how much they save on mortgage rates.

The Widening Spread Between Short and Long Rates

Since last summer, Federal Reserve rates have dropped sharply while 30-year California mortgage rates have decreased by less than 1%. This highlights the fundamental difference between short-term and long-term rates.

Longer-term loans are inherently riskier. The longer it takes a borrower to pay money back, the greater the chance of default at some point. Also, the longer it takes the lender to get paid back, the greater the risk that inflation will erode the value of the money the lender has coming.These are reasons why long rates are generally higher than short rates, and with default risk and inflation looming prominently in the minds of lenders these days, it is easy to understand why long-term rates have declined much less significantly than short-term rates. The result is a wider spread between short and long rates.

Risk vs. Reward with Adjustable-Rate California Mortgages

One way to take advantage of the sharper decline in short-term rates would be to apply for an adjustable-rate mortgage. The initial rate on an adjustable rate mortgage that resets after one year behaves more like a short-term interest rate. So, while 1-year adjustable California home loan mortgage rates were actually higher than 30-year California mortgage rates last summer, they are now nearly a full percentage point below, at just over 5%.

Of course, one risk of adjustable rates is that they can cause problems is that rates and payments can increase in the future -- a problem that California home loans have already seen their full share of.

The Middle Ground: Best of Both Worlds?

To save money on a California home loan without the unpredictability of an adjustable rate mortgage, one option would be to shorten up from a 30-year to a 15-year mortgage. After being nearly identical at the start of 2007, the spread between these rates had widened to nearly 0.40% recently. Naturally, because it is a short-term loan, a 15-year mortgage will require higher monthly payments. However, as a way to take some advantage of the faster decline in shorter-term mortgage rates, while retaining the stability of a fixed-rate mortgage, a 15-year mortgage may be well worth considering.

A second alternative is a hybrid ARM in which the rate is fixed for several years and then converts to a true adjustable rate mortgage. This option is particularly attractive for homeowners who don't plan on keeping their homes for more than a few years.


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