Adjustable-rate mortgages slip in popularity

Real Estate Watch

January 20, 2002

The adjustable-rate mortgage market slid to a three-year low in popularity last year as homebuyers preferred fixed-rate mortgages with interest rates at 30-year lows, according to an annual survey by Freddie Mac.

Adjustable-rate mortgages grabbed only 12 percent of the mortgage market in 2001, down from 21 percent in 2000, according to the survey. The 12 percent is the lowest share since 1998's 11 percent share, which was an all-time low. ARMs were first offered in the early 1980s.

Homebuyers did not find the spread between adjustable-rate mortgages and fixed-rate mortgages advantageous since, according to Freddie Mac, the initial rate for a one-year ARM was 5.27 percent compared with fixed rates that hovered between 6.5 percent and 7 percent by the end of last year.

Hybrid adjustable-rate mortgages, however, remained popular among lenders, Freddie Mac said. Hybrids combine an initial fixed-rate period of three or five years with annual adjustments thereafter.

"Hybrid ARMs are especially attractive to families who plan to be in their home for three to five years," said Frank Nothaft, Freddie Mac's chief economist.

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