Hybrid adjustable-rate mortgage products are more popular with both lenders and consumers than those loans which reprice on a fixed schedule (such as the one-year ARM), Freddie Mac says.
However, the overall popularity of ARMs continues to pale beside the demand for fixed-rate mortgage loans. ARMs are only 7% of new mortgage loan applications submitted, according to the most recent Mortgage Bankers Association survey.
Among the types of hybrid ARM products available in the marketplace, the most common offered by lenders is the 5/1, followed by the 3/1, 7/1 and 10/1.
Freddie Mac surveyed 106 ARM lenders and found 84 offered Treasury-indexed ARMs while 22 originated ARMs indexed to Libor. Generally, community and regional lenders were more likely to offer Treasury-indexed ARMs while large, national lenders offered Libor ARMs.
Given that the larger firms are offering the Libor ARM, it is more than half of ARM production, Freddie Mac says.
Borrowers are favoring FRMs right now because of low interest rates and the certain of the monthly payment, Freddie Mac chief economist Frank Nothaft says.
But as rates rise ARMs will become more attractive to consumers, who are likely to prefer the longer initial fixed rate terms associated with the hybrid ARM, he says.
Right now there is a 136 basis point interest rate savings with the 5/1 ARM versus the 30-year FRM. This translates into savings of $194 per month on a $250,000 mortgage over the first five years.
ARMs should make up 12% of new mortgage production in 2014 as mortgage rates rise, says Nothaft.
Compared with last year, the initial rate for ARMs with a shorter fixed rate period is flat. But the spread widens as the initial term lengthens. For the 7/1 ARM, the current initial rate is 71 bps higher than one year ago, while for the 10/1 it is 76 bps. This reflects the Federal Reserve keeping short term rates low, while allowing medium and long-term rates to increase, Freddie Mac points out.