Mortgage rates stall

By Holden Lewis • Bankrate.com

Mortgage rates stalled this week, with barely a change across the board.

The benchmark 30-year fixed-rate mortgage slipped to its lowest point since October 2004, falling 1 basis point to 5.67 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.32 discount and origination points. One year ago, the mortgage index was 5.72 percent.

The benchmark 15-year fixed-rate mortgage inched up 2 basis points to 5.16 percent. The benchmark one-year adjustable-rate mortgage held steady at 4.48 percent.

Mortgage bankers often talk of the spread, or difference, between different mortgage products. Let's take a look at the narrowing spread between the 30-year fixed and the one-year adjustable. A month ago, the average rate on a 30-year fixed was 5.81 percent and on the one-year ARM, 4.38 percent. Subtract the ARM rate from the fixed rate and you have a spread of 1.43 percentage points. In the following weeks that spread has shrunken to 1.32 percent, then 1.27 percent, then 1.20 percent, and this week's 1.19 percent.

A year ago, the spread was 2.04 percent. When compared to the 30-year fixed, a one-year ARM was a much better deal a year ago than it is now.

Naturally, you would assume that ARMs are less popular now than a year ago, when they were comparatively a better deal. That would be an erroneous assumption. A year ago, about 27 percent of mortgage applications were for ARMs; last week, it was more than 32 percent, according to the Mortgage Bankers Association.

It's a bizarre world when ARM rates go up and fixed rates go down, and people embrace ARMs anyway. Bankers attribute this head-scratching development to the rise of the hybrid mortgage, and specifically a hybrid called the 5/1 ARM.

A 5/1 ARM has an initial rate that's higher than that of a one-year ARM, but lower than that of a 30-year fixed. It keeps that initial rate for five years and then is adjusted annually thereafter. There are also 3/1, 7/1, 10/1 and other hybrid ARMs.

The Mortgage Bankers Association doesn't differentiate between one-year and hybrid ARMs in its weekly statistics. Bankers believe that the 5/1 hybrid makes up about 40 percent of new ARMs and is supplanting the one-year as the most-popular adjustable. Freddie Mac started tracking weekly movements in the rates of 5/1 ARMs, and Bankrate.com will replace the one-year ARM with the 5/1 ARM in its weekly index, starting next month.

A lot of people "would tell you the 30-year fixed-rate loan isn't the loan of choice anymore," says Doug Perry, senior vice president of Countrywide Home Loans. "There are a lot of experts who say when you're getting a 30-year fixed-rate loan, you are overbuying that fixed-rate period. And you're paying extra every month."

Perry agrees with most experts when he says hybrid ARMs are a good fit for lots of people, because most homeowners don't hold their mortgages for 30 years -- they sell the home or refinance the loan long before then. But he is reluctant to give general advice, because everyone's situation is different.