Adjustable rate mortgages have lost their appeal to both home buyers and refinancers, putting the traditional 30-year-fixed rate back on the ascendancy.
A recent survey by the Mortgage Bankers Association found that industrywide, ARMs accounted for 44 percent of the mortgage market in March, down from a peak of 59 percent in January.
A separate study by the big secondary mortgage lender Freddie Mac found that 63 percent of people with ARMs who refinanced in the final quarter last year switched to the 30-year-fixed rate.
“The tendency for borrowers with ARMs to refinance into new ARMs declined dramatically in the period, to just 19 percent,” Freddie Mac said.
MBA President Joe Pickett said that home buyers and refinancers are moving away from ARMs because of the recent decline in mortgage interest rates. When fixed rates are affordably low, they generally are the most attractive option for most buyers.
But another reason for the drop in ARMs, Pickett said, is “the difference between the interest rates on one-year ARMs and 30-year fixed rate loans, which peaked at a record 3.5 percentage points in April 1994 but has since dropped below 2 percentage points.
“The difference is making fixed rate mortgages relatively more attractive for both home purchase and refinance loans.”
The narrow spread between fixed rates and the initial ARM rate has continued into the current quarter. Recently the average interest rate on a 30-year fixed rate mortgage was 8.06 percent while the 1-year ARM is offered at 6.14 percent, according to HSH Associates, a mortgage information firm. That’s a difference of just 1.9 percentage points. Some 30-year mortgages have been offered below an 8 percent rate.
Another interesting change is occurring among people with 15-year mortgages. The Freddie Mac survey found that more than half-56 percent-of refinancers with 15-year mortgages switched into a 30-year loan in the final quarter last year.
That’s an unusually high percentage going from a shorter loan to a longer loan.
But Robert Van Order, chief economist for Freddie Mac, said it’s a logical reflection of the current interest rate situation.
For homeowners refinancing today “the motivation is different” than among those who refinanced a couple of years ago, he said.
Back then, when rates were 7 percent and lower, refinancers were looking to lower their monthly payments or cut the term of their mortgage. Either way, they were saving thousands of dollars in the long run.
Today, with rates more stable, “there is almost no one who is refinancing to get a lower rate because they can’t,” Van Order said.
That leaves a second type of refinancer in the market.
Van Order said that in some cases, homeowners fall on hard times and can no longer afford the higher payments on a 15-year mortgage. In many cases, though, people refinancing want to take cash out of the house to pay for home improvements or college tuition or other expenses.
Of course, when you take cash out of your house, the mortgage increases and with the larger balance, the payments are higher. That frequently is enough to cause a switch out of a 15-year mortgage to the more affordable 30-year alternative.
