Adjustable Rate Mortgages (ARMs) Remain at Historic Lows

Adjustable rate mortgages (ARMs) remain at historic lows according to the announcement released by Freddie Mac in its Annual Survey.   The 1-year ARM has remained essentially unchanged since last year's survey while initial period rates on hybrid loan products rose.  This was to be expected as a result of the Federal Reserve’s monetary policy which kept the federal funds rates and other short-term interest rates at record lows while allowing a rise in medium- and longer-term interest rates from last year.

Hybrid ARMs have a fixed rate for an initial period ranging from three to 10 years and then adjust annual thereafter.  Nearly all of the ARM lenders participating in the survey offered a hybrid with the 5/1 far and away the most common of the products both in terms of availability and use, followed by the 3/1, the 7/1 and the 10/1.  Less common are ARMs with longer repricing periods such as a 5/5 which features rate adjustments every five years for the life of the loan.

The survey, which was conducted January 6 to January 10, showed that the largest rate increases were for hybrids with longer initial fixed-rate periods.  The 7/1 ARM rose by 0.71 basis points  from last year and the 10/1 was up 0.76 basis points. 

According to Freddie Mac, “Homebuyers have preferred fixed-rate mortgages the past few years because of the low interest rates and the certainty of the monthly principal and interest payment. As longer-term rates rise, ARMs with their lower initial interest rates will become more appealing to loan applicants. Hybrid ARMs are particularly attractive because they have an initial extended fixed-rate period of 3 to 10 years."

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