Hammer the Libor is one of the indices that the hybrids convert to after the fixed period. My advice to people is to track the 10 year, then add around 1.1-1.25 (+/- 10-15 basis points) to get an approximate rate for a standard 30 year fully amortized mortgage with maybe 1 point for origination. This is just an approximation. The hybrid fixed components will vary around that value. The problem is that when you try to figure out the rates of the 5/1, 7/1 etc after the reset you are trying to peer into the future to see what the Libor will do. Most people that (or should I say most SANE people) only use these types of loans because they know they will be selling (or they have been duped by some broker or Realtor to think they can refinance) prior to the conversion. The bottom line is that they will not be paying the monthly payment based on the Libor, it will be based on the fixed component of the mortgage which was ultimately generated based on the 10 or 30 year.
I think the best thing people can do is to not worry about what rates are doing today but what direction are they trending. Clearly looking at the 10 year the trend line appears to be up. Thus even the fixed components of the 5/1, 7/1 etc will be moving up as long as the 10 yr keeps going that way.
The other thing to realize is that rate sheets are created pretty much daily. As most of you know, maybe some don’t, are that lenders generate new rate sheets every day based on the movement of the bond market. When the bond market sells off, (rates go up) and thus the lenders boost rates immediately. Now when the bond market rallies and rates go down, lenders do not generally move immediately. They will wait to see if the market stays at the new level for a few days and if that happens, then they lower the rate. (yes they screw people by hiking quickly and lowering very slowly)…
Also I have confined my analysis to the 10 year treasury but the 30 year is also pertinent. They pretty move (or trend shall I say) in lock step.
ps – I am not a mortgage broker and all the above diatribe was my own speculation!
