Survey: ARM Discounts Up, Hybrids Popular

Greater lender discounts for introductory ARM rates and the rising popularity of hybrid ARMs were among the findings of Freddie Mac's 22nd Annual Adjustable-Rate Mortgage Survey.The survey also found smaller savings in interest payments for ARMs relative to fixed-rate loans, largely as a result of the flattening of the yield curve, Freddie Mac said. (A flattening of the yield curve occurs when the spread between short- and long-term rates narrows or disappears, reducing initial interest savings on ARMs versus fixed-rate mortgages.) "When the interest rate difference between a 30-year fixed-rate mortgage and the fully-indexed ARM rate decreases, lenders generally offer a larger initial rate discount on the ARM," said Frank Nothaft, Freddie Mac's chief economist. "The larger initial discounts increase the initial rate benefit of an ARM compared with fixed-rate loans, helping lenders to maintain ARM originations." The survey found that average discounted introductory rates grew from 1.4 percentage points for conventional one-year Treasury-indexed ARMs at the end of 2004 to 1.9 percentage points at the end of 2005.