Survey: Hybrid ARMs Popular, Discounts Bigger

Growing demand for hybrid adjustable-rate mortgages and greater lender discounts for introductory ARM rates were among the findings of Freddie Mac's 21st annual ARM survey.Hybrid ARMs -- annually adjusting ARMs with an initial fixed-rate period of more than one year -- have accounted for the majority of purchase-money ARMs since 2002, and the dominant variety has been 5/1 ARMs, those with an initial fixed-rate period of five years, said Frank Nothaft, Freddie Mac's chief economist. About 40% of all ARMs were 5/1 ARMs in 2004, he reported. Regarding average discounted introductory rates, the survey found that they grew from about three-eighths of a percentage point for conventional one-year Treasury-indexed ARMs at the beginning of 2004 to 1.34 percentage points at the end of the year. "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," Mr. Nothaft said. Bigger discounts increase the initial rate benefit of an ARM and help lenders maintain ARM originations, he added.