Refinance to an ARM?

Borrowers who took out adjustable rate mortgages three or four years ago have seen their loan rates move with financial indexes to about 3%. However, with analysts predicting that rates on mortgage loans of all types should increase in the coming years, even happily ARMed homeowners are contemplating a switch to a fixed-rate mortgage, according to a recent report in The Wall Street Journal.

Are ARMs Dead?

Maybe.

Data compiled by MortgageDataWeb.com, a Virginia-based marketing firm for the real estate industry supports this. The number of newly-originated ARMs is down, but so is the number of new mortgage originations of all types–from 322,390 in May 2005 to only 77,222 in November 2009. However, the number of ARM originations has plunged like a Hummer off a cliff–from 146,852 in May 2005 to a paltry 2,225 in December 2009.

Five years ago, in March 2005, 45.75% of all purchase home loans were ARMs. But by December 2007, only 7.21% of all new mortgages were, and that share hasn’t exceed 9.0% in any month since then. ARM originations hit a low of 2.85% in February 2009 before bouncing back at the end the year to 4.52%.

ARMs are no longer a popular refinance vehicle either–the number of homeowners seeking an ARM mortgage refinance has deflated from over 60% in early 2005 to less than 1% at the end of 2009, even though mortgage lenders were offering 5/1 ARMs (fixed for five years, and adjustable annually thereafter) at rates as low as 3.25% to highly-qualified borrowers.

ARMs Are Still a Viable Choice for Many

According to Pew Research, 63% of people do not remain in their home towns, most frequently citing economic opportunity as the reason for moving. And the more educated or affluent you become, the more likely it is that you will move. Furthermore, younger people may change houses even if they stay in the same community–as they start families or earn more, many desire a change of address as well. So if the odds are that you’re going to change homes in the next five years or so, why not opt for a hybrid ARM and save a full percent on your interest rate?

How Much Can You Save?

On a $350,000 mortgage, the difference between a 4% mortgage and a 5% mortgage is $208 a month. Over a five year period, that’s $12,480–a good start on your future kid’s college fund!

In mortgage lending, there’s no one-size-fits all home loan. Make sure your lender considers your unique situation when making recommendations.