We're Still Saving on Hybrid ARMs

The interesting mortgage news for 2006 continues: Freddie Mac released its 22nd annual Adjustable Rate Mortgage (ARM) Survey just last week. The study found that traditional 1-year ARMs have lost even more market share to "hybrid" ARMs. IN fact, lenders have continued, even increased, initial period discounts to borrowers to keep ARMs viable in the mortgage marketplace. What does this mean? It means that the initial period of discount may be 3, 5 or even 7 years, and that lenders are doing this to attract your business.

What's the big deal, you might wonder. Let's look at the ARM in its original form. The 1-year ARM is a mortgage in which the rate is set for one year and then adjusts every year thereafter, with standards and restrictions based on indexes and margins. Hybrid ARMs are a new invention; A hybrid ARM is one with a longer term introductory period - three, five, seven, even ten years during which the rate remains at its original level and then adjusts every year thereafter. Borrowers, particularly those who will be stretching to make payments often choose an ARM because the lower payments for the first year or first five years allow them to qualify for a mortgage. Further, the borrower is getting some degree of "safety" (in the discount period) and then can actually take advantage of changes in the interest rate. This made hybrid ARMs very attractive in the past few years, when interest rates were actually declining steadily.

However, rates are now on the move up. This long term benefit of an ARM is gone. What remains is the attractiveness of the initial discount period. And since rates are not likely to fall for some period of time, the longer discounted periods continue to make ARMs a good consumer choice.

Keep in mind that lenders like ARMs too. Why? Because it keeps you in the game! They are making money by lending and upward pressure on rates impact them because less people will want to borrow.


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