ARMs Now Require Payment Premium

McLean, VA-Say goodbye to the teaser rate and hello to the payment premium on adjustable-rate mortgages.

ARM lending fell sharply last year as the initial payment savings disappeared, according to a survey by Freddie Mac.

"Our survey found that starting rates for conforming one-year ARMs averaged 1.76 percentage points above their fully indexed rate, the largest rate premium observed since Freddie Mac began collecting ARM data in 1984," said Frank Nothaft, chief economist at Freddie Mac, in a news release.

In addition, with 30-year fixed mortgage rates falling to a 50-year low, consumers could find FRMs at rates in many cases lower than the initial rate on an ARM loan. It's the first time in the history of Freddie Mac's survey that FRMs were broadly available at lower initial interest rates than most ARM products.

In December, the ARM share of loan applications fell to 3%, the lowest ever recorded in Freddie Mac's survey. During the peak of the housing boom, the ARM share was around 36%, Freddie Mac said. The initial rate on ARM loans did not decline as much as yields on one- or three-year Treasury securities during the fourth quarter.

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