Fewer Home Buyers Using Adjustable Rate Mortgages

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The falling demand for home loans has a great negative impact on adjustable rate mortgages, in particular. These loans have got quite a lot of bad press in recent years and this is one of the major factors for their lower popularity. The other factor is the still high economic uncertainty.

Currently, just 1 out of all 10 mortgage loans taken out by home buyers is an adjustable rate mortgage. This accounts for a market share of 10%. This is much lower than the share which these mortgages had before the housing market crisis of 2007.

These mortgages have some of the lowest interest rates in the market at present. The average interest rate on a classic 5/1 ARM, which has a fixed rate for 5 years and then adjustable rate for 25 years, is currently 3.00%. It is 1.20% lower than the interest rate on a 30-yeaf fixed mortgage which is currently 4.20%. If the mortgage rates increase considerably over the coming years, however, the adjustable rate can become much higher.

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The adjustable rate mortgages do carry a higher risk that their fixed rate counterparts. Their rates are adjusted based on an index, which can be LIBOR, COFI, CMT or T-Bill. At present, these indexes tend to be quite low and this favors consumers with adjustable rate mortgages.

At the same time, the fact that the indexes are at low levels means that they will inevitably increase in the future. It is not clear when this will happen and how large the increase will be, but it is highly likely that the adjustable rate home loans will become more expensive. In such a situation, borrowers can use exit strategies such as refinancing, but they can be effective only if the rates on fixed mortgages are lower.

Until the economy improves considerably and households started earning higher income, the low demand for adjustable rate mortgages is expected to remain.

Christian

Christian

Christian Calvin mortgage Christian is a contributing writer for Mortgage.info. He is a graduate from the University of Tennessee with a degree in Communications and a concentration in Broadcasting. Christian has served as vice-president for a privately-held company for more than 20 years. Additionally, he has also applied his writing and business knowledge to various websites with a focus on business and sports news . . . both of which are passions. Christian enjoys playing golf and spending time with his family and friends.

Contact: christian@mortgage.info
Christian

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