The increased popularity of hybrids is largely due to the cost savings from considerably lower initial interest rates compared to 30-year fixed-rate mortgages without the onerous amortization schedule of a 15-year fixed-rate or balloon payment. Table 2, below, shows the most recent interest rates across the various mortgage products. Borrowers with shorter time horizons are willing to trade the certainty of a 30-year fixed rate mortgage for a more affordable monthly payment. Hybrids fill the void for borrowers who have expectations of selling or refinancing in less than 10 years and mitigate the interest rate risk inherent in traditional 1/1 ARMs. Hybrids are particularly attractive to first-time home buyers who are stretching to qualify for loans or buyers with expectations of trading up in a couple of years.

Table 2

National Average Mortgage Rates, November 2003
30-yr Fixed Rate*	5.94
15-yr Fixed Rate*	5.28
1-yr ARM	3.63
3/1 ARM	4.49
5/1 ARM	5.10
7/1 ARM	5.64
10/1 ARM	5.84
*Week ending 11/7/03 Source: HSH Associates, Mortgage Banking Association

In the primary market, the volume of ARM originations has grown steadily since 1990, except in 1999 and 2002 when ARM originations increased sharply as shown in Figure 1 below. In 2002, of the $2.48 trillion of 1-4 family mortgage originations, 10% or $254 billion were ARMs. According to Fannie Mae, conventional hybrid ARM originations reached $175 billion in 2002, approximately 7% of total mortgage originations. >>>