So is it finally a farewell to ARMs - the once-ubiquitous adjustable-rate mortgages?
You might think so with fixed-rate loans priced just slightly above one-year Treasury-indexed adjustable rate mortgages.
After all, why bother with an ARM at 5.8 percent - the average contract rate at the end of December, according to the Mortgage Bankers Association of America - when you could get a 15-year fixed-rate loan at 5.9 percent, or 30-year fixed-rate mortgage at 6.2 percent, all with roughly the same origination fees?
The latest national statistical survey bears this out: New adjustables dropped to a 25 percent share of the total market late last year, according to mortgage investor Freddie Mac's annual ARM survey - down from a 33 percent share as recently as 2004.
Adjustables, which were introduced in the United States in the early 1980s, once ruled the home-loan roost. In 1984 they accounted for nearly 2 of every 3 new mortgages. Of course, those were the bad, bad old days of hyperinflation, when fixed-rate loans went for 15 percent and up, and one-year ARMs in the low double-digits looked like a relative bargain.
The type of adjustable that dominated during the mid-1980s no longer is a major factor, even within the diminished ARM slice of the market itself. Half of all lenders who offer adjustable-rate loans no longer include one-year, Treasury-indexed ARMs on their menu anywhere - the lowest proportion in 23 years.
Now the top adjustables are all hybrids - essentially 30-year loans that come with a fixed rate for the first three, five or seven years. After the fixed-rate period is over, the loan morphs into a one-year adjustable that floats with market rates, up or down.
Many hybrids never get past the rate-reset date, however. They are often refinanced into a replacement mortgage or paid off. Forty percent of all adjustables in the 2006 survey were "5/1" hybrids, according to Freddie Mac, with an average initial rate of 5.96 percent fixed for the first five years.
That rate was just 0.5 percent higher than the average floating one-year ARM rate in the survey.
By the first week in January, the 5/1 hybrid went for an average 6.02 percent compared with 6.2 percent for 30-year fixed-rate conventional mortgages.
Frank E. Nothaft, chief economist for Freddie Mac, says the 5/1 adjustable not only offers a slightly lower cost compared with competing 30-year fixed-rate loans, but also locks in monthly payments for the first 60 months - a big plus for people who expect to sell, move or refinance within a few years.
