Fixed Rate Mortgages Gaining in Popularity
Borrowers and lenders alike appear to be shifting their attention from Adjustable Rate Mortgages (ARM) to Fixed Rate Loans (FRM). Although 3/1 and 5/1 hybrid ARMs continue to do well, overall, FRMs are gaining momentum.
The news was revealed this week when Freddie Mac announced the results of its annual survey of prime loan Adjustable Rate Mortgages (ARM loans). Based on data collected just before Christmas, the survey revealed the following.
Borrower Incentive Has Changed
The difference in interest rates for ARM and FRM loans has narrowed, providing less reason for borrowers to consider an ARM than previously.
Lender Wariness
Lenders have experienced an increase in the number of delinquent ARM loans that far exceeds the delinquency rates of fixed rate loans, causing lenders to view ARM loans with an increased level of risk. This, combined with other factors, has lowered the rate discount traditionally applied to ARMs. “In our latest survey, the rate discount had virtually dissappeared on these products,” says Freddi Mac’s chief economist, Frank Northaft.
Net Effect
ARMs, which accounted for one of every three mortgages in 2004, only account for 17 percent of the loans issued in October 2004, making ARM loan popularity just half of what it used to be during its peak.
Still, within the ARM world, hybrid ARMs continue to grow in popularity. These loans carry a fixed rate at first, then move to an adjustable rate at the end of the fixed rate period. The length of that initial period can vary. A 5/1 hybrid, with an initial, fixed rate period of five years, is the most popular of the hybrids, followed by the 3/1 hybid. And these types of loans are easy to get, especially for conforming loans (those with values lower than $417,000). 5/1 Hybrids are offered by more than 90 percent of the lenders that participated in the survey.
Source: Freddie Mac
