WHY ADJUSTABLE RATE MORTGAGES ARE DOWN

If you want to know why the gap between ARM rates and fixed rates is widening, you need to know a little about how lending institutions and the bond market work.

Lenders who make fixed-rate loans typically peg their rates to 30-year bonds. Once they’ve made a loan, they can’t change the borrower’s interest rate--just as a bond issuer can’t change the rate after it has sold you a bond.

Lenders that specialize in ARMs, however, pay more attention to fluctuations in the short-term bond market. That’s because they typically have the right to change the rate on the ARMs they make every six or 12 months.

Rates on long-term bonds have risen lately because investors and lenders are concerned about the crisis in the Persian Gulf, rising oil prices and an uptick in inflation. Consequently, rates on fixed mortgages have risen too.

Meanwhile, a weakening economy and fears of a recession have pushed short-term rates lower. Rates on ARMs have followed suit.