Adjustable-Rate Mortgages To Account for Nine Percent of Home Purchases in 2011

January 18, 2011 No Comments »


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.

Before the mortgage crisis struck, most of these loans were interest only and/or option arms, those which negatively amortize.

Looking back, you can’t really blame homeowners entirely for choosing ARMs, as they were often the only choice to make mortgage payments affordable, at least in terms of debt-to-income ratio.

But it’s clear they were not the most economical choice, considering the number of foreclosures we’ve seen, many of which were tied to all those interest rate resets.

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.

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