Adjustable-Rate Mortgages Gain as Other Loans Fall

Mortgage specialist Jay Dacey couldn't keep coaxing clients to take advantage of the low mortgage interest rates without hopping onto the bandwagon himself. But the 30-year-old from the Twin Cities-area took a route that might make one do a double-take. He refinanced out of a 30-year-fixed rate of 4.75 percent and into a 5-year interest-only adjustable rate mortgage with a 3.875 percent rate.

"My wife and I refinanced into an interest-only ARM because the lower payment allows us to build up savings and invest more while we are young," says Dacey, whose payments dropped from $1,750 a month to $1,065 per month. The ARM is set to adjust in June 2015. (See AOL Real Estate's guide "Refinancing Do's and Don'ts.")

While the refinance share of mortgage activity decreased to 80.5 percent of total applications from 81.9 percent the previous week, according to the latest survey by The Mortgage Bankers Association, activity in adjustable-rate mortgages rose to 6.2 percent from 6.1 percent of total applications.

So yes, there are people still taking out ARMs. But aren't ARMs what got us into this whole housing crisis, when people could no longer afford their homes at adjusted rates?
"ARMs caused this problem like pencils cause misspelled words," says Dacey. That ARMs caused this mess "is a very nice excuse politicians give when pointing fingers. They encouraged reckless lending in the name of homeownership for everyone, including those who weren't financially ready."

But many who are financially ready are still finding it tough to get refinancing.

"Refinancing may actually be more challenging in some markets, due to appraisal issues with existing borrowers' homes," says Thomas Meyer, CEO of J.I. Kislak Mortgage in Miami Lakes, Fla. "So much equity has been lost that in order to refinance, borrowers will have to come out with cash out of pocket to qualify under today's underwriting guidelines.

"It's as if there is a present under the Christmas tree, that unfortunately you can't unwrap."

"In markets where housing prices have not fallen as precipitously," Meyer says, "people will take advantage of this once-in-a-lifetime refinance opportunity."

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The Refinance Index decreased 10.8 percent for the week ending Sept. 10 from the previous week, according to the MBA. The seasonally adjusted Purchase Index decreased 0.4 percent from one week earlier. The unadjusted Purchase Index decreased 21.9 percent, compared with the previous week, and was 39.7 percent lower than the same week one year ago.

Dacey's refinance into a 3.875 percent ARM was not the first time the couple had refinanced on the home they purchased in Little Canada, Minn. in September 2008. Their original loan was financed at 7.375 percent and their lender paid mortgage insurance.

"By the spring of 2009 we had completed a major remodel and built up the value to refinance into a conventional loan without the mortgage insurance. We locked in at 4.75 percent, which paid all of our closing costs, and our payment dropped by about $550 per month."

How many years are left before Dacey thinks he'll have his whole mortgage paid off?

"Never," he says. "Paying down our mortgage is not a short or long-term priority. It's cheap money with tax benefits."

The average contract interest rate for 30-year fixed-rate mortgages decreased to 4.47 percent from 4.50 percent, with points increasing to 1.08 from 0.96 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans. The effective rate is unchanged from last week.

The average contract interest rate for 15-year fixed-rate mortgages decreased to 3.96 percent from 4.00 percent, with points increasing to 1.03 from 0.87 (including the origination fee) for 80 percent LTV loans. The effective rate is unchanged from last week.

For more on mortgages and refinancing see these AOL Real Estateguides:

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