With Record Low Rates, Who Wants an ARM?

BOSTON (MainStreet) — Mortgage rates continue to be at historic lows, begging the question: Why would anyone still get an Adjustable Rate Mortgage?

With rates about as low as they could possibly be and nowhere to go but up, where's the upside and logic to financing property using one?

On Thursday, Freddie Mac, in its Weekly Primary Mortgage Market Survey, reported that U.S. mortgage rates once again fell.

The average 30-year, fixed-rate mortgage was at 4.12%, with an average 0.7 point; 15-year fixed-rate mortgages averaged 3.33% for the week, with an average 0.6 point, down from an average of 3.39% the previous week.

Five-year Treasury-indexed, hybrid adjustable-rate mortgages averaged 2.96% with an average 0.6 point. A year ago, the five-year ARM averaged 3.56%. One-year, Treasury-indexed ARMs averaged 2.84%, with an average 0.6 point; at this time last year, the one-year ARM averaged 3.46%.

Jacqueline Racz, a loan originator with Pennsylvania-based PrimeLending, has been in mortgage banking since 1993 and seen shifts in which audiences gravitate to various products.

"Even back in the '90s when fixed rates jumped up into the nines, the ARMs were always very low in comparison," she says. "Right now they just seem so close to each other because fixed rates haven't been this low for a very long time. But ARMs are always popular for certain individuals in certain situations. Everyone is quick to jump on that 30-year fixed, but there are many scenarios to consider."

Where ARMs were once frequently sought out by those scraping by to make a home purchase — trading the money saved from a lower rate against the hope their future income would keep pace with future payment increases — those seeking out this variety of loan these days are more likely to be either wealthier or more strategic.

Racz sees three key areas where homebuyers might gravitate toward an ARM: to lower payments further, especially on Jumbo loans; if they have a job that moves them around every few years; or if they know they will be downsizing or moving (after their children finish school, for example) or no longer need the home they are in and that paying the loan off in full over 30 years is not a goal.

On a large loan amount, the difference between a 4.5% 30-year and 3.25% on a 3/1 ARM can be hundreds of dollars a month, Racz says.