ARMs Nearly Disappearing as Refi Choices

In the second quarter, 97% of prime borrowers who originally had a one-year conforming adjustable-rate mortgage chose a conforming fixed-rate mortgage when they refinanced, according to Freddie Mac. Freddie's Refinance Product Transition Report also indicated that 87% of prime borrowers who initially had a conforming hybrid ARM refinanced into a conforming fixed-rate loan. (The comparable figures in the first quarter were 92% and 80%, respectively.) Furthermore, nearly all borrowers who had a fixed-rate loan refinanced into another long-term fixed-rate loan. "Even though refinancing borrowers who take out a one-year adjustable-rate mortgage today would save about three-quarters of a percentage point in rate relative to a five-year ARM or 15-year fixed-rate mortgage, the concerns about inflationary pressures leading to future interest rate increases may be causing borrowers to choose the safety and certainty of fixed rates," said Frank Nothaft, chief economist for Freddie Mac. ".... Teaser rates on ARMs have largely disappeared. During the second quarter, the initial interest rate on one-year ARMs averaged three-tenths of a percentage point higher than the fully indexed rate. Without an extra discount, ARMs just aren't attracting many borrowers in today's market." Freddie can be found on the Web at http://www.freddiemac.com.