Article published January 30, 2011
Revised adjustable-rate mortgages emerging from lenders' deep freeze
By KENNETH R. HARNEY
WASHINGTON POST WRITERS GROUP

WASHINGTON — After years of virtual exile from the home loan arena, adjustable-rate mortgages are starting to attract applicants again, according to a new survey of 112 lenders by mortgage giant Freddie Mac. Adjustables accounted for just 3 percent of new home loans in early 2009 but are projected to be the choice for nearly 10 percent of borrowers this year. In the jumbo and superjumbo segments, the share will be larger, according to Frank Nothaft, Freddie Mac chief economist.

How could this be, with fixed 30-year rates at half-century lows, hovering just under 5 percent? Isn't it always smarter to lock in a low fixed rate for as long as possible rather than gamble on a rate likely to bounce around?

That logic still holds up for most people, but not for everybody. The boom-era models of adjustable-rate mortgages have pretty much disappeared — there are no more of the two-year adjustables that hooked record numbers of consumers in 2003 and 2004 with teaser rates that needed to be refinanced with heavy fees within 24 months.

The most popular adjustable in the market today, according to the Freddie Mac survey, is the "5-1" hybrid. Its rate is fixed for the first five years, then adjusts annually for as much as the next 25 years, with rate caps to cushion shocks if rates suddenly spike.

There are also "7-1" and "3-1" hybrids. The antique one-year adjustable still is available but doesn't attract many borrowers.

The key to the growing popularity of hybrid adjustables is in their pricing. According to data supplied by Dan Green, a loan officer in Cincinnati and author of TheMortgageReports.com blog, the rate spread between 5-1 hybrid adjustables and 30-year fixed-rate loans has widened to around 1.625 percentage points.

To illustrate, say a buyer is interested in a $250,000 conventional loan to buy a house.

The buyer has a 740 FICO credit score and wants to close in 45 days.

He could opt for a 30-year fixed loan at 4.75 percent, with a monthly principal and interest payment of $1,304. Or he could choose a 5-1 adjustable at 3.125 percent, with a monthly payment of $1,071.

Hybrid adjustables don't make financial sense for everybody. But for someone who knows a transfer or a need to sell the house will occur within five to seven years they merit a serious look.