Return of the Adjustable Rate Mortgages

After being exiled, these Adjustable Rate Mortgages appear to be making a comeback.

A new survey of 112 lenders by mortgage giant Freddie Mac found that Adjustable Rate Mortgages are starting to attract applicants again. Adjustable rate mortgages accounted for just 3% of new home loans in early 2009 but are projected to be picked by nearly 1 out of 10 borrowers in 2011. In the jumbo and super-jumbo segments, the share will be even larger, according to Freddie Mac chief economist Frank Nothaft.

The pre-bubble boom adjustable rate mortgages, where you were teased with low rates that needed to be refinanced with heavy fees within 24 months and you needed to fog a spoon to qualify.  This time, adjustable rate mortgages may actually make more sense.

The most popular ARM in the market today, according to the Freddie Mac survey, is the 5-1 hybrid. Its rate is fixed for the first five years of the loan, then adjusts annually for as much as the next 25 years, with rate caps to cushion payment shocks if rates suddenly soar. There are also 7-1 and 3-1 hybrids. The antique one-year ARM still is available but doesn’t get a lot of takers.

Adjustable Rate Mortgage Example:

According to data supplied by Dan Green, a loan officer with Waterstone Mortgage Corp. in Cincinnati and author of TheMortgageReports.com blog, the rate spread between 5-1 hybrid ARMs and 30-year fixed-rate loans has widened to around 1.625 percentage points.

To illustrate, say you’re interested in a $250,000 conventional loan to buy a house. You’ve got a FICO credit score of 740 and want to close in 45 days. You could opt for a 30-year fixed loan at 4.75%, requiring a monthly principal and interest payment of $1,304. Alternatively, you could opt for a 5-1 ARM fixed at 3.125%, costing $1,071 in principal and interest per month — a $233 saving.

These adjustable rate mortgages can be even more attractive on some of the larger sized loans as well.  Unlike the previous over-utilization of the adjustable rate mortgages, these hybrids can work in certain situations.  If you have a higher end loan where you expect to live there for 5-7 years, than an adjustable rate mortgage could make perfect financial sense for you.

http://www.latimes.com/business/realestate/la-fi-harney-20110130,0,6342118.story

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