Hybrid ARMs, some of which have rates significantly lower than 30-year fixed-rate mortgage alternatives, are growing in popularity, according to survey.
FROM THE WASHINGTON POST WRITERS GROUP
WASHINGTON — After years of virtual exile from the home loan arena, is the adjustable-rate mortgage staging a quiet comeback?
Could an ARM be on your shopping list the next time you need to buy a house or refinance?
You might be surprised. A new survey of 112 lenders by mortgage giant Freddie Mac found that ARMs are starting to attract applicants again. Adjustables accounted for just 3% of new home loans in early 2009 but are projected to be picked by nearly 1 out of 10 borrowers in 2011.
In the jumbo and super-jumbo segments, the share will be even larger, according to Freddie Mac chief economist Frank Nothaft.
How could this be, with fixed 30-year rates at half-century lows, hovering just under 5%? Isn’t it axiomatic that it’s always smarter to lock in a low fixed rate for as long as possible rather than gamble on a loan whose rate might bounce around in the years ahead?
That logic still holds up for most people, but not for everybody. Here’s why. The boom-era models of the ARM have pretty much disappeared — there are no more of the two-year adjustables that hooked record numbers of consumers in 2003 and 2004 with teaser rates that needed to be refinanced with heavy fees within 24 months. No more “pick-a-pay” ARMs that were mass-marketed with loosey-goosey underwriting and the potential for negative amortization.
No more “pick-a-pay” ARMs that were mass-marketed with loosey-goosey underwriting and the potential for negative amortization.
The most popular ARM in the market today, according to the Freddie Mac survey, is the 5-1 hybrid. Its rate is fixed for the first five years of the loan, then adjusts annually for as much as the next 25 years, with rate caps to cushion payment shocks if rates suddenly soar. There are also 7-1 and 3-1 hybrids. The antique one-year ARM still is available but doesn’t get a lot of takers.
The real key to the growing popularity of hybrid ARMs is in their pricing. Rates are significantly lower than fixed 30-year alternatives, with no teasers or negative amortization involved. In some cases, they also come with other attractive terms, such as more flexible underwriting standards.
According to data supplied by Dan Green, a loan officer with Waterstone Mortgage Corp. in Cincinnati and author of The- MortgageReports.com blog, the rate spread between 5-1 hybrid ARMs and 30-year fixed-rate loans has widened to around 1.625 percentage points.
To illustrate, say you’re interested in a $250,000 conventional loan to buy a house. You’ve got a FICO credit score of 740 and want to close in 45 days. You could opt for a 30-year fixed loan at 4.75%, requiring a monthly principal and interest payment of $1,304. Alternatively, you could opt for a 5-1
See MORTGAGE, page C32
