A Farewell to ARMs?

The recent drop in long-term interest rates will spark additional refinancing, but much of it will likely come from borrowers refinancing out of adjustable-rate loans and home equity products, the chief economist of Freddie Mac has told MortgageWire.Economist Frank Nothaft said that because rates have remained "low and relatively stable" over a number of years, most people who could refinance to improve their rate and terms have already done so. But with the yield curve between short- and long-term interest rates tightening, and many hybrid ARMs approaching a conversion to one-year adjustable status, some borrowers will find that at today's rates, they can refinance into a fixed-rate product with a lower interest rate than their fully adjusted ARM. In addition, borrowers with home equity lines of credit may find that their HELOC rate, often about 3 percentage points above the prime rate, exceeds current fixed mortgage rates. That may lead them to refinance their first loan, rolling their HELOC debt into a cash-out refinancing.