Adjustable-rate mortgages are gaining new attention and popularity due to a continuing climb in mortgage interest rates and a widening spread of the rates between adjustable-rate and fixed-rate loans. "The average rate on a fixed, 30-year home loan ticked up to 4.33 percent from 4.27 percent last week," according to Freddie Mac. "By comparison, the average rate on a five-year adjustable stood at 3.03 percent."
The growing interest in ARMs, enjoying its largest increase in interest since 2009, is not surprising since short term rates are low and the 10-year bond and treasury yields are high. "ARMs accounted for 37.1% of mortgages held on banks' books during the fourth quarter of 2013, up from 35.8% in the same period a year earlier and 31.9% two years prior," according to Inside Mortgage Finance. Additionally borrowers benefit from some of the lowest rates today. The 1-year LIBOR is at historically low rates and it has only fluctuated 26 bps in the last 3 years.
ARMs are an excellent choice for home owners who don't anticipate holding on to the property for the full term of the mortgage. These types of borrowers include:
- first-time home buyers who plan to sell within a few years
- homebuyers who move every few year due to job changes
- families with short-term housing needs for any reason
An ARM is also a smart choice for:
- families that know, because of upcoming large expenses like college, they will want to refinance in the future
- individuals who want to pay off other debt with the savings made in the initial term period
- borrowers whose income may go up in the future.
Until recently, ARMs had fallen out of favor. They carry inherent risk, were considered to be a key factor in the last housing bubble and fixed-rate mortgages were available at interest rates close to or even lower than ARMs. Now, though, ARMs are the only way home owners can get a mortgage with a rate below 3 percent. Borrowers who've missed out on low fixed-rate mortgages will find it worthwhile to consider whether an ARM is a financially smart choice for their situation.