Interest Rate Correction as they Relate to Interest Only Loans

March 20, 2023March 20, 2023 Alan Fine interest only loans, interest rates, mortgage interest rate corrections

10 yr. T-Note(Treasury Note) is a key benchmark indicator for long term rates. It’s Yield(rate) peaked in Oct 2022 at 4.22% level before dropping back to 3.33% low on Feb 2th 2023. This is the second market correction since the bottoming of interest rates in the Fall of 2020. A market correction refers to an adjustment in the opposite direction to the major trend.

Factors that contributed to this recent correction(ease) in interest rates have been decline with inflation. The CPI(Consumer Price Index is a closing followed Index followed by the financial community and government. The CPI had accelerated upward from Spring 2021 to June 2022. Since June 2022 the CPI peak with monthly change 1.3% increase before falling to Dec 2022 to -.01% (See Chart below) . This easing view of inflation prompted an ease of interested rate seen with Bond Yields & Mortgage Rates

CPI

Seasonally adjusted changes from preceding month							Un-adjusted 12-mos. ended Dec. 2022
Jun. 2022	Jul. 2022	Aug. 2022	Sep. 2022	Oct. 2022	Nov. 2022	Dec 2022	Un-adjusted 12-mos. ended Dec. 2022
1.3	0.0	0.1	0.4	0.4	0.1	-0.1	6.5

Interest Only Mortgage Rates will move in a parallel direction to the fixed mortgage rates & Treasury Bonds Rates. 30 Yr Mortgage Rate Peak of 7% & Since has corrected(fallen) to 5.75% Level.

The 10 Yr Arm had peaked at 6.75% level and has fallen back to 5.75% level. Keep in Mind that the Interest Only loans will price at a premium to an Arms(principal + Interest payment), and as an example the 10 Yr IO rate has fallen to 5.75% .625 pts. Understand there are a lot of variables for the Interest Only loans that can change the pricing(rates & cost). Some general variables are Jumbo loans 750k and above have the best rates compared to smaller loans under 750k . A 30 Yr IO will have extremely high premium as much as 2-2.5% in rates compared to the shorter term 5, 7 and 10 Yr Interest Only loans .

In Summary the Treasury Yields & Mortgage Rates have moved sharply lower as the interest rate corrected, prompted in part for an ease inflation outlook which is seen in the CPI from Dec 2022 that is reported in the following month, Jan 2023. Interest Only Rates have fallen with the general interest rate market and provide a good value now as of Feb 2, 2023. The next cycle after this correction will be for interest rates to return to their long-term uptrend.

Alan Fine
Interest Rate Advisor/Retirement Mortgage Strategist