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She said they called trying to get her to take out a larger loan. She said she didn't want that. They then told her that since she is in a 5 year ARM and her credit has been good with them, that they will do a changeover for her to a 30 year loan, no points, no costs, no fees of *any* kind. At the same interest rate she has now....Why would any financial institution do this?

Because the yield curve has flattened considerably, which means that the spread between a 5/1 ARM and a 30 year fixed has also narrowed considerably, and that's at zero points (meaning you'd still pay closing costs).

If you get "negative" points (IOW, you let the lender pay some or all of your closing costs) your rate will be slightly higher, but the rates increase faster with a 5/1 ARM (or, another way of putting it, you get fewer negative points with each 1/8% increase in rates) than with a 30 year fixed.

Which is a long-winded way of saying that the 30 year fixed at no costs to close may have a lower rate than a 5/1 ARM with no costs. I'm about to lock on a 30 year FRM (yes, changing from a 5/1 ARM), and (just looked it up) through the lender I'm working with, in my situation, at 5.375% or higher the 30 year FRM is cheaper than the 5/1 ARM.

So, your answer in a nutshell is "flattening yield curve, and negative points".

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