Adjustable Rate Mortgages Are A Wise Choice for Borrowers

NEW YORK (MainStreet) — No one's satisfied with the pace of the housing recovery, but there's no doubt things are getting better. Still, a quick snap back to normal is unlikely.

"While it seems we have made our way out of the turbulent times that have bounced the market around for the last few years, there is still plenty of uncertainty ahead," says Keith Gumbinger, vice president of, the mortgage and housing research company.

In his midyear analysis, Gumbinger says rates on 30-year fixed mortgages could edge up to 5% or 5.25% by the end of the year, from today's 4.233%. With the economy improving, the Federal Reserve will continue to wind down efforts to keep long-term interest rates down, Gumbinger says. A 5% rate would still be low by historical standards.

But the Fed will still strive to keep short-term rates down, he says. As a result, introductory rates on adjustable-rate mortgages will stay low. The widening gap between ARM and fixed-rate loans will make ARMs a wise choice for more borrowers. Hybrid, 5/1 ARMs, which carry a fixed rate for five years, then adjust to market conditions every 12 months, could charge initial rates of between 2.9% and 3.9%, he says.

Qualifying for a mortgage will not be as difficult as it was in the depths of the economic crisis, but will probably continue to be more difficult than in "normal" times, Gumbinger says. That's due partly to tougher federal regulations to ensure borrowers will be able to make their payments.

Still, he notes that a few lenders have been dipping their toes into the subprime mortgage market, which involves loans to applicants with less-than-stellar credit. A wave of subprime loans gone bad helped trigger the crisis, and it is not likely that the most toxic products, such as "liar loans" that required no proof of income, will return, he says.