Liz Freeman’s Weekly Mortgage Blog

By: Liz Freeman
January 22nd, 2009  

Economy Weakness = ARM Strength

Adjustable Rate Mortgages (ARMs) can be a risky home loan choice– the Mortgage Bankers Association reports almost 12 percent of grade-A (not subprime) borrowers with ARMs are defaulting on their loans, compared to only 2.75 percent of homeowners with fixed rate mortgages. Borrowers who can’t refinance out of Option ARM loans–with very low start rates and lots of negative amortization–are suffering. Some payments have more than doubled.

The lucky homeowners with conventional or hybrid ARMs are celebrating, however. The average rate for those start rates have reset or adjusted is now 4.66 percent. And people whose loans are resetting shortly should do even better. The 1-year CMT (Constant Maturity Treasury), a widely-used ARM index, was down to .49 percent in December 08t. Adding a typical 3% percent margin gets you a rate of 3.49 percent!

So unless you’re planning to stay in your home forever and want to take advantage of sub-5% fixed rates you should be in no hurry to refinance that ARM.