ARM Becoming More Attractive

Spread between 30-yr fixed rate & ARM now at 2.07%
By SAM GARCIA
3/29/2002

Adjustable rate mortgages (ARM's) picked up steam this past week, becoming a more attractive option for many borrowers. According to housing finance giant Freddie Mac, who surveyed 125 thrifts, commercial banks and mortgage lending companies, the average 1-year ARM was 5.11%, unchanged from last week. At the same time, Freddie said that the average 30-year fixed rate was up four basis points (BPS) -- or 0.04% -- to 7.18 percent.

Freddie's chief international economist, Robert Van Order said that "interest rates for fixed-rate mortgages edged up this week, as the market tried to decipher new releases of economic indicators and how strong the economy will be in the first three months of the year."

The resulting spread between the rising 30-year and the unchanged ARM was 2.07%, up 4 BPS from 2.03% last week. Applications continued to reflect the increasing attractiveness of the ARM, with the Mortgage Bankers Association of America (MBA) reporting that ARM applications represented 16.50% of total applications, up slightly from last week.

In its weekly survey of mortgage bankers, commercial banks and thrifts, MBA said that purchase applications were up more than six percent from last week, and refinance applications nudged up 3.15%.

Nearly two-thirds of the mortgage bankers, mortgage brokers and other industry experts surveyed by Bankrate.com expect for rates to remain within 2 BPS of current levels during the next five weeks. "Inflation is not yet pushing rates higher," said Bankrate.com's financial analyst, Greg McBride.

"At the moment inflation remains tame and the Federal Reserve Board appears to be on hold over raising short-term rates, commented Freddie's Van Order. "This should keep mortgage rates from skyrocketing in the near future."

However, an imminent Fed rate increase sometime this year leads Bankrate.com's McBride to believe that "mortgage rates will inevitably rise, but at a pace dictated by inflation and economic growth."

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