Just when you thought it was safe go to back in the water: ARMs are staging a comeback.
by Donny Mak
on Tuesday, January 31st, 2012 at 1:00am.
Did you hear the one about the mortgage banker option on the new BMW? No rear view mirrors.
Adjustable Rate Mortgages (ARMs) made up 40 percent of mortgages in the midst of the subprime lending spree. Surprisingly ARMs are staging a slow comeback since hitting their bottom of 3 percent in early 2009. New ARM home loans are back up to 10 percent, and Freddie Mac predicts it could reach 14 percent by year’s end.
Why, you ask. Record low mortgage rates bring more people into banks, and those people can show less debt-to-income ratio based on a 4% rate now than they could at 8% three years ago. But they can’t come up with the down payment – at least not right now. Enter, the ARM.
They’re calling these types of terms a “hybrid” ARM, which blends the best parts of a fixed-rate mortgage and an adjustable-rate mortgage. A Hybrid has an initial fixed interest rate period followed by an adjustable rate period. After the fixed interest rate expires, the interest rate starts to adjust based on an index plus a margin. The date at which the mortgage changes from the fixed rate to the adjustable rate is referred to as the reset date. So why is this different from 2005?
Example: a “5/1” hybrid ARM is the most popular one. For five years your mortgage is fixed. After five years, since there’s a cap – a reasonable one -- the interest rate can’t go up through the roof (like they did in the subprime meltdown). It’s a kinder, gentler ARM. Sort of an “ARM 2.0.”