Freddie Mac: Hybrid ARMs are “hot”

Annual Adjustable-Rate Mortgage Survey shows impact of low interest rates

Hybrid adjustable-rate mortgages continue to be the most popular ARM loan product offered by lenders and chosen by borrowers, according to the 31st Annual Adjustable-Rate Mortgage Survey of prime loan offerings from Freddie Mac.

According to Freddie’s survey, which was conducted from Jan. 5 through Jan. 8, nearly all of the ARM lenders participating in the survey offered a hybrid.

The 5/1 hybrid, a five-year fixed-rate initial period before the rate resets annually, was by far the most common, followed by the 7/1, 3/1 and 10/1, Freddie said.

Far less popular among the survey participants are ARMs where the repricing frequency is fixed for the life of the loan, such as a one-year adjustable; a 3/3 ARM, which adjusts once every three years; or a 5/5 ARM, which adjusts every fifth year.

According to Freddie’s survey, the current low rate environment is contributing to the popularity of ARMs, with current ARM initial-period rates down over 2014’s rates.

“For a one-year, 5/1 or 10/1 Treasury-indexed ARM, the average initial rate was 2.39%, 2.98%, and 3.71%, respectively, down 0.2 percentage points for the one-year and 5/1 products and 0.3 percentage points for the 10/1 ARM,” Freddie said.

Borrowers chose a hybrid ARM because of the “substantial payment savings” during the initial years of the loan, Freddie said. “In early January 2015, the interest rate savings for the 5/1 hybrid ARM with a 30-year term — the most common ARM offered in today's market — compared to the 30-year fixed-rate mortgage amounted to 0.75 percentage points,” Freddie said.

“For a $250,000 loan, the monthly principal and interest payment on a 5/1 hybrid would be about $103 less than on the 30-year fixed-rate loan over the first five years of the loan,” Freddie added.

And the savings can be even greater on a loan with a high initial balance, according to Frank Nothaft, Freddie Mac’s vice president and chief economist.

“Because consumers who choose an ARM often are taking out a higher-balance loan, their payment savings can add up over the first few years of the loan,” Nothaft said.

“The average loan size for a conventional ARM for home purchase was more than $400,000 during 2014 and about double the size of an average fixed-rate loan, according to data from the Federal Housing Finance Agency. On a $400,000 loan, a family would save about $9,000 during the first five years of a 5/1 hybrid compared with a 30-year fixed-rate loan, based on interest rates collected in our survey. “

Nothaft also predicts that the expected rise in interest rates in 2015 could lead to an increased interest in ARMs.   

"Today's low mortgage rates will not be around forever. Even a majority of the Federal Reserve's policy-making committee expect interest rates to rise by year-end,” Nothaft said. “Higher rates on both ARM and fixed-rate products, and further gains in home values, could lead more borrowers to opt for an ARM.”

According to Nothaft, ARMs comprised about 10% of home-purchase loans in the conventional market, in 2014, citing data from the FHFA. “If fixed-rate loans become more expensive and home values rise further, we expect more consumers to take another look at ARMs and project the ARM share rising to 12% of the conventional home-purchase market in 2015," Nothaft said.

Latest Articles

United Wholesale Mortgage removes extra employment verification requirement on all loans

United Wholesale Mortgage, the largest U.S. wholesale lender, said it was removing an extra rule, or overlay, it implemented last month requiring a borrower’s employment to be re-verified on the day of closing.

Jun 03, 2020 By
3d rendering of a row of luxury townhouses along a street

Log In

Forgot Password?

Don't have an account? Please