McLEAN, Va. (1/27/15)--Hybrid adjustable-rate mortgages (ARMs) are the most popular ARM offerings from lenders, according to Freddie Mac's annual Adjustable-Rate Mortgage Survey. This is the 31st year of the survey, which was conducted Jan. 5-8 on prime loan offerings.
Hybrid ARMs combine elements of fixed- and adjustable-rate mortgages. It has an initial fixed-interest rate period (generally three to 10 years), followed by an adjustable-rate period, which is adjusted annually.
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According to Freddie Mac, the 5/1 hybrid is the most popular ARM. This means the rate is locked in for five years, then it will reset annually. The average 5/1 rate is 2.83% compared with 3.63% for a 30-year fixed. After 5/1 loans, 7/1, 3/1 and 10/1 are the next most common.
Freddie's survey found that the initial interest rate was lower for all ARM products compared with last year. One-year ARMs and 5/1s were down 0.2 percentage points, while 10/1s were down 0.3 percentage points.
In early January, the interest rate savings for a 5/1 with a 30-year term, the most common ARM offered, was 0.75 percentage points better than a 30-year fixed rate loan. For a loan of $250,000, the monthly principal and interest payment for a 5/1 would be about $103 less than the 30-year fixed over the first five years of the loan.
"The average loan size for a conventional ARM for home purchase was more than $400,000 during 2014 and about double the size of an average fixed-rate loan, according to data from the Federal Housing Finance Agency (FHFA)," said Frank Nothaft, Freddie Mac vice president/chief economist. "On a $400,000 loan, a family would save about $9,000 during the first five years of a 5/1 hybrid compared with a 30-year fixed-rate loan, based on interest rates collected in our survey."
During 2014, ARMs comprised about 10% of home purchase loans, according to FHFA data.
|Above is a five-year history of credit union reports on balloon/hybrid first mortgages outstanding and originated year to date. (Source: CUNA)|
"If fixed-rate loans become more expensive and home values rise further, we expect more consumers to take another look at ARMs and project the ARM share rising to 12% of the conventional home-purchase market in 2015," Nothaft said.
Credit unions have seen growth year-over-year in balloon/hybrid mortgages. The average such loan has risen to $274,879 from $194,094 in 2010, according to Credit Union National Association data. The value of outstanding loans rose 20.8% from 2010 to 2011, 11.8% from 2011 to 2012, 28.4% from 2012 to 2013 and 12.7% from December 2013 to September 2014.