ARMs less popular, Freddie Mac reports

Adjustable-rate mortgages (ARMs) are waning in popularity but remain the mortgage of choice for certain homebuyers, according to a Freddie Mac survey released in January 2008.

Applications for ARMs represented just 17 percent of prime mortgage applications in October 2007, the lowest since June 2003, Freddie Mac said in a news release outlining the findings of its annual ARM survey. (Freddie Mac is a government-sponsored mortgage-finance corporation that buys mortgages and resells them to investors on the secondary market.)

While applications are down, delinquencies on prime ARMs are up. At the end of September 2007, the rate of serious delinquencies was 3.1 percent, compared with 1.1 percent a year earlier. The delinquency rate for prime fixed-rate loans was less than 1 percent.

Highs and lows
Since 1995, the ARM share of mortgage applications has ranged from a high of 33 percent in 2004 to a low of 11 percent in 1998, Freddie Mac said. ARMs are more popular when interest rates rise because the introductory interest rate can be significantly less than the rate on a 30-year fixed-rate loan.

But when interest rates are low, as they are now, the difference between the introductory ARM rate and the fixed rate can be as little as .25 percent. That leaves little incentive for borrowers to take on the higher risk many associate with an adjustable-rate mortgage, said Pamela Hamrick, vice president of operations for LendingTree Loans.

Popular ARMs
The most popular type of adjustable-rate mortgage is a 5/1 ARM, in which the rate adjusts upward after five years, according to Freddie Mac’s surveys. More than 90 percent of lenders surveyed offered 5/1 ARMs. The new interest rate can be as much as 5 percentage points higher than the introductory rate, said Frank Nothaft, Freddie Mac vice president and chief economist.

Many lenders also offer 3/1 and 7/1 ARMs, in which the rate adjusts after three years or seven years.

What’s right for you?
Hamrick said homeowners who don’t plan to stay in their home long can benefit from the lower monthly payments of an adjustable-rate mortgage. An ARM also can make sense for someone expecting a significant bump in their income before the rate adjusts, she said.

Refinancing to a fixed-rate mortgage may be an option for some homeowners. Keep in mind that for now, most lenders have significantly tightened lending standards, and that home values in many areas of the country have dropped. If either factor is in play when you try to refinance, it could affect your ability to refinance and to get the lowest possible interest rate.

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