There are some things that seem universally true in mortgage writing. Annual percentage rate, or APR, is almost always described as being "higher" than the stated interest rate. Because loans cost money to originate and the ARM calculation incorporates the fees into the rate. And adjustable rate mortgages, or ARMs, are inevitably depicted as possessing a "low" start rate or "teaser rate," which then "increases" when it adjusts. Well this world has been turned upside down. Short-term rates are so low now that ARM start rates are frequently higher than the adjusted rate. Some are adjusting today down to less than four percent!
And that throws the APR calculation off as well. Because when the APR is calculated, it is assumed that the rate will adjust to current rates (the financial index its tied to plus a margin of generally between 2 and 3 percent) at the end of the introductory period. Right now, those indexes are near zero and thus the APRs are lower than the start rate.
So normally an adjustable rate mortgage or hybrid ARM would be more desirable with a longer introductory period; today, the shorter the better. For example, Freddie Mac's average 1-year ARM start rate is 4.92%. But if adjusting today with the 1-year Constant Maturity T-Bill index at .61%, a loan with a margin of 2.75% would be adjusting to 3.36%, assuming that it didn't have a rate floor (limit to how low it can go). If the loan has a floor rate of 4%, that is the lowest the interest rate will go regardless of what happens in the financial markets.
So in today's environment, those who have short-term goals and don't plan to keep their property for many years could be well-served by getting an ARM with no floor or a very low one. And a short introductory period is better than a long one. So a 3-month ARM based on the LIBOR index could start at 4% today and be adjusting down to 3.25% in three months. Why would you want a 5/1 hybrid ARM and be stuck at 5.5% for years?
