Latest Inflation Numbers A Threat To Adjustable Rate Mortgages

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Latest Consumer Price Index released by the Department of Labor Indicates 7.4% Inflation Annualized

The US Bureau of Labor Statistics announced that the Consumer Price Index for All Urban Consumers (CPI-U) increased 0.6 percent in March, before seasonal adjustment, an annualized rate of 7.4%.

Oil prices also closed at a record $72.17 on the New York Mercantile Exchange. With supply constraints in the Gulf of Mexico, Iraq, and Nigeria, analysts are expecting oil prices to continue trending higher throughout the summer.

Oil futures contracts for the next 3 years are all trading above $70 per barrel. "In effect, the market is saying this is going to be with us for a while," said A.G. Edwards & Sons commodity analyst Bill O'Grady.

With oil prices heading higher, most experts expect inflation rates to remain at current levels, or trend slightly higher, putting more upward pressure on home mortgage rates.

In the most recent decade, because of an environment of falling interest rates and inflation, many people who refinanced their homes opted for an adjustable rate mortgage. This provided the best of both worlds: an initial interest rate that was lower than a comparable fixed-rate loan at the time, and, in an environment of falling interest rates, the monthly payment on their mortgage kept going down with each passing year. However, the environment of falling inflation and interest rates no longer exists.

That said, there is a growing concern that both inflation and interest rates will continue to trend higher for the foreseeable future. "Get the inflation call right, hedge your housing decisions and you may well be able to moderate what looks like an even more inflationary time to come." said Goerge Ure of

There is no getting around the fact that both higher oil prices and inflation will put upward pressure on home mortgage rates. "I am suggesting to every client of mine to lock in low fixed rate 30 year mortgages now, while they are still available," said Christine Carter of

"It just simply doesn't make any sense for new mortgage applicants to opt for an adjustable rate mortgage in an environment of rising interest rates, especially while 30-year fixed rates are still near historic lows," she said.

Some analysts caution that the mortgage lending industry could see a significant spike in foreclosures as rising interest rates effect the roughly one-third of all mortgages originated in the US last year. Some fear that many borrowers who stretched their budgets to buy the most house they could afford using a lower-rate ARM will be forced into default by significantly higher payments due to rising interest rates.

However, in recent months economists at the Federal Reserve Board have downplayed the threat of a spike in foreclosures due to rising interest rates.


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