Despite a perceived uptick in mortgage rates, adjustable-rate mortgages are expected to grab a nine percent share of the home purchase market this year, according to Freddie Mac‘s 27th Annual ARM Survey.
The ARM-share of home purchase mortgages peaked at 40 percent back in 2004, but fell to as low as three percent in early 2009, before settling in around seven percent today.
Regardless, ARMs will grow in popularity again, especially since the interest rate savings between the initial start rate for traditional 1-year ARMs and 30-year fixed mortgages nearly doubled to about 1.5 percentage points from 0.8 percentage points a year ago.
However, for the third consecutive year, most ARMs have initial rates (teaser rates) above the actual fully-indexed rate, which is the sum of the mortgage index and the margin.
This phenomenon has to do with the fact that mortgage indexes are at historic lows, so there aren’t any initial savings on ARMs at the moment.
The good news is that when they do adjust, there won’t be any payment shock – but as the mortgage indexes eventually rise, ARM resets will matter again.