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Adjustable-rate loans comprise one-third of real estate purchases

Freddie Mac survey shows rising rates on ARMs

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Adjustable-rate mortgages accounted for 34 percent of the conventional purchase-money market in 2004, which is the second highest annual share since 1994 when the share was 39 percent, according to an annual survey released by Freddie Mac Initial rates on ARMs rose by about 40 basis points over the course of the year because they typically are priced off of financial instruments with shorter maturities that match the length of the initial adjustment period, said Frank Nothaft, vice president and chief economist for Freddie Mac. "When the interest-rate difference between a 30-year fixed-rate mortgage and the fully-indexed ARM rate decreases, lenders generally offer a larger initial rate discount on the ARM," Nothaft said. "The larger initial discounts increase the initial rate benefit of an ARM compared with fixed-rate loans, helping lenders to maintain ARM originations. Long-term mortgage rates were little affected, averaging about the same at the end of the year as they did in the...