Eight months ago, adjustable-rate mortgages were as popular as the Jersey Shore in January.
“You couldn’t give them away,” said Keith S. Gumbinger, an analyst with HSH Associates of Butler, N.J., which monitors mortgage interest rates.
In January, with 30-year fixed rates just below 7 percent, obtaining a one-year ARM-even with an introductory rate of 3 percent-seemed to make little sense to borrowers.
But as mortgage rates began to inch upward, so did consumer interest in ARMs. In June, adjustable-rate mortgages accounted for 43 percent of all home loans nationwide, compared with just 23 percent in January.
Mark Zandi, an analyst with Regional Financial Associates in West Chester, Pa., said fixed rates had risen nearly 2 percentage points so far this year, making adjustable-rate mortgages more attractive.
“ARMs rates also have moved up since January, but they’re still a percentage point or so below fixed rates,” Zandi said. “And those introductory teaser rates-sometimes as low as 3 1/2 percent for a one-year adjustable-make them interesting and attractive.”
The average 30-year fixed rate nationally is about 8.5 percent. The rate on a one-year ARM hover just above 5 percent.
“Fixed-rates still make up the majority of the mortgage market,” Gumbinger said. “And despite the increase, they remain relatively inexpensive.”
So, what’s the difference then? Why should a prospective home buyer shop around for a mortgage after-or even before-he or she goes shopping for a house?
Here’s why: Picking the right mortgage at the right time could save you lots of money.
As Fred Glick of Hart Mortgage Corp. in Ft. Washington, Pa., explains it, the payment-principal and interest-paid on a 30-year fixed-rate mortgage stays the same for the life of the loan.
The rate (and the monthly mortgage payment) made on an adjustable-rate mortgage may change, depending on the kind of ARM it is. If it is a one-year, the rate may go up or down every year. If it is a 10/1-year, the rate stays the same for the first 10 years, and then becomes a one-year adjustable until the 30th year.
Caps-limits on how much the interest rate on an ARM can increase or decrease-average between 1 and 2 percentage points a year, and 4 to 6 percentage points over the life of the loan, Glick said.
The rate adjustment is determined by what it costs the bank to obtain the money it lends to the buyer, and the margin, or amount of profit over that cost. How much the money costs the bank is determined by whatever index is used to determine the bank’s borrowing costs.
Right now, if you obtained a $75,000, 30-year fixed mortgage at 8.125 percent, your monthly principal and interest payment would be $556.87.
If you took out an adjustable with a 5 percent introductory rate and a 2-point annual cap, the first year’s payment would be $402.62.
Lenders have been marketing ARMs heavily this year, creating even more demand for the loan.
“They need them for their portfolios,” Gumbinger said. “Last year’s refinancing wave has decimated many lenders’ portfolios. So, to sell ARMs, lenders are coming up with cheaper interest rates and more flexible underwriting standards.”
There are a number of these mortgages being marketed. The one-year ARM remains the best-known, and most popular, because there is usually a low introductory rate.
GMAC Mortgage Corp. in Elkins Park, Pa., recently introduced a “First Step” adjustable mortgage that requires lower down payments than traditional ARMs-5 percent instead of 10 percent-and lets borrowers select an option to close with zero points.
Two-step mortgages-the 5/25-year and 7/23-year-also are gaining popularity. They are technically not adjustable-rate mortgages and are not included in ARM statistics. They adjust once in their lifetimes, either at five or seven years, to about one-quarter of point above the fixed rate at the time. The introductory rate today is about two-thirds of a percentage point below a comparable 30-year fixed mortgage.
These mortgages now account for about 20 percent of Phoenix Mortgage Corp.’s business, according to Ed Fallon, vice president of the Willow Grove, Pa., lender. That’s up from 10 percent six months ago.
“We consider them short-term fixed mortgages,” Fallon said. “They better match the needs of the typical home buyer, because the mortgages give them a chance to plan . . . stability in payments.”
