Hybrid ARMs Remain the Most Popular Flexible Mortgage Products, Survey Says

While hybrid cars are not as popular as conventional, gas-powered vehicles, the story is different in the adjustable-rate mortgage market when it comes to hybrids. Data from the 31st Annual Adjustable-Rate Mortgage Survey of Freddie Mac shows that hybrid ARMs are the most popular such mortgage products that lenders offer and consumers take advantage of.

The Freddie Mac survey, which ran from January 5 through January 8, revealed that almost all ARM lenders who took part in the survey offered some sort of hybrid ARM product. 5/1 hybrids were the most popular among all the products offered, followed by 7/1, 3/1, and 10/1 hybrid mortgages. All these aforementioned products are mortgages wherein the mortgage rates change annually. 3/3 hybrid ARMs and 5/5 hybrid ARMs, however, proved less popular; these particular products have interest rates changing at fixed intervals throughout the life of loan.

Hybrid ARMs

Freddie Mac stated in its survey that the current mortgage lending climate, where interest rates are substantially lower than they were one year ago, has boosted the popularity of ARMs. Fixed mortgage rates so far have gone down the most as compared to last year’s interest rate data, though ARM interest rates have also been substantially lower than they were a year ago.

According to the housing giant, one-year, 5/1, and 10/1 Treasury-indexed ARMs are now at 2.39 percent, 2.98 percent, and 3.71 percent respectively. That represents a decline of about 20 basis points for the first two products, and about 30 basis points for the 10/1 ARM.

Talking about the reasons why consumers opted for hybrid ARMs, “substantial payment savings” during the first few years of the2 loan were stated as the main reason. “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,” said Freddie Mac. Given a loan valued at $250,000 and the current interest rates, monthly principal and interest payments would be a shade over $100 less than the payments on a 30-year FRM over the first five years of the mortgage.

Another advantage, according to Freddie Mac vice president and chief economist Frank Nothaft, is the savings being higher on mortgages with higher initial balances. “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,” he remarked.

Nothaft also cited separate data from the Federal Housing Finance Agency that said the average loan size for conventional home purchase ARMs was over $400,000 last year, or about twice the size of the average fixed mortgage. “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,” said Nothaft.

He forecasted that the expected mortgage rate hike in 2015 could send consumers flocking toward ARMs, as opposed to fixed loan products. The Federal Reserve generally expects higher interest rates by the end of 2015, and with home prices expected to rise in parallel with mortgage interest rates, ARMs could be more appealing than fixed-rate mortgages.