Fewer People Opting for Adjustable Mortgages
November 29, 2005, Wall Street Journal — The cheap mortgage that helped pump up the housing boom is finally in retreat. Demand for so-called option adjustable-rate mortgages has dropped 25% in recent months, according to estimates by UBS AG. Just this summer, these loans accounted for more than 30% of jumbo mortgages, UBS says. Option…
November 29, 2005, Wall Street Journal — The cheap mortgage that helped pump up the housing boom is finally in retreat. Demand for so-called option adjustable-rate mortgages has dropped 25% in recent months, according to estimates by UBS AG. Just this summer, these loans accounted for more than 30% of jumbo mortgages, UBS says. Option ARMs carry teaser rates of as low as 1% and give borrowers multiple payment choices, but can lead to a rising loan balance.At Washington Mutual Inc., option ARMs accounted for 29% of mortgage volume in the third quarter, down from as much as 40% a year earlier. IndyMac Bancorp says option ARMs fell to 31% of its loan volume in the third quarter from 39% the previous quarter. The declining popularity of option ARMs comes as short-term interest rates have risen and some lenders have raised prices on these loans for new borrowers. As a result, fixed-rate mortgages are regaining popularity and some borrowers are becoming disenchanted with their option ARMs.
A Trendy Mortgage Falls from Favor [Wall Street Journal]
I’ve just learned the danger of posting about something before I really know what I am talking about. This article is about “Option ARMs” – quite a different animal than a standard ARM. These things do look nasty.
ARMs can be a very cost effective way to finance a home. They are not for everyone, but in the right situation can significantly lower the cost of borrowing money. You do lower your costs by assuming some additional risk (the risk that short term rates will go up when the rate lock period ends) but this risk can be mitigated. The only reason why ARMs are not as popular now is that the yield curve has flattened so the benefit of an ARM versus a long term fixed mortgage is not as great. You can bet that when the yield curve returns to a more normal shape ARMS will come back into fashion. They certainly are not “going away.”
The ‘spread’ between long term fixed and adjustable/variable rates has narrowed greatly. So of course people will choose the fixed. They would save so little in 1st few years not worth it.
This is a good thing. These scare me. I don’t think enough people read the fine print. Home prices are what they are and will do what they’re going to do, but seeing these go away can’t be bad in any event.