San Francisco Bay Area home buyers are up in ARMs.

That's not surprising, considering what it costs to buy a home in the cradle of technological progress.

ARMs, adjustable rate mortgages, are the financial weapon of choice for Bay Area home buyers because the mortgages help mitigate escalating housing costs.

"If you took a look at being in an adjustable in last four or five years, it's been great," said Gary Nunes, vice president of business development at the Loan Source in Campbell, CA.

Nationwide, home buyers turn to ARMS only about 30 percent of the time according to Freddie Mac.

In California, statewide, it's 32 percent. The San Francisco Bay Area clocks in at 46.5 percent and home buyers in some counties use them even more often. It's 58.1 percent in Santa Clara County (Silicon Valley), and more than a whopping 60 percent in both San Francisco and Marin counties, according to Acxiom Corporation's DataQuick Products Division in La Jolla, CA.

"ARM usage can go up when prices go up and potential buyers think that the market may be getting away from them. It can also go up when prices go up, and borrowers have trouble getting a fixed-rate mortgage," said Mike Ela, of DataQuick.

In the San Francisco Bay Area, even with a 20 percent down payment, many mortgages are "jumbo" loans, those larger than cheaper "conforming" loans that max out at $252,700.

That's because the median home price in the San Francisco Bay Area is $371,180, compared $133,000 nationwide.

With fixed rates in three-year-high territory, an ARM gives the Bay Area buyer some financial leverage -- especially with so-called "5/1" or "7/1" hybrid ARMs that remain fixed for five or seven years and then adjust each year for the remaining term of the mortgage.

Initially, an ARM's rate -- and the mortgage payment -- is lower than a fixed rate, from about a quarter point to two points or more, depending upon the ARM and the economy.

"If I'm saving just a half percent over a five-year period on $500,000, that's a substantial amount of money," says Rob McCarthy, a mortgage planner with First Portfolio, also in Campbell.

Nunes, looking at current loans in Silicon Valley where the median home price last week was $467,000, found zero-point mortgages at 8.25 percent for a 5/1 and 8.75 percent for a fixed-rate, 30-year loan. On a $400,000 loan, the ARM costs $3,005.06 a month, $141.74 less than the fixed rate's $3,146.80 monthly outlay. That's an annual savings of $1,700.88 and $8,504.40 over the five year initial rate period.

Cheaper 1-year ARMS offer even more dramatic savings. Nunes found a 7 percent, zero-point ARM that would cost $2,661.21 a month, $485.39 less than the fixed-rate $400,000 loan mentioned above.

"That sounds like an auto payment. That sounds like an investment program. That sounds like more than both my sons' monthly car insurance," said Nunes.

The temporarily cheaper ARMs also allow buyers to qualify for more home or a home they couldn't otherwise afford.

ARMs aren't without their risks, however. They tend to rise after their initial rate period.

Many home buyers move within five or seven years, however, and gamble they can offset that risk by refinancing to an affordable fixed-rate if they stay put or move up.

In the San Francisco Bay Area, however, the gamble is riskier. Home values have risen more than 60 percent since the mid 1990s and moving up in a hot market with low inventories isn't easy.

"Do you really think these people believe they will be moving up? They know they are lucky to be living in a house in the Bay Area right now," said Julie Chancerelle-Ziemelis, who along with her husband, Eric, recently purchased a triplex investment home in Sunnyvale, CA.

The couple lives in one unit and rents the other two.

"From someone who jumped from a fixed-rate mortgage to an ARM and now (almost) wish I had not: Everyone who knows that the economy is over-heated knows that the Fed is going to push up the interest rates which will affect the bond market which affects your mortgage adversely in an ARM."

"Locking into a fixed rate now guarantees all those people who bought a multiple-offer house will be set for the long haul," she said.

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Published: February 24, 2000

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A journalist for 35-years, Broderick Perkins parlayed an old-school daily newspaper career into a digital news service offering editorial content and consulting services. Perkins' San Jose, CA-based DeadlineNews Group includes the flagship news site, DeadlineNews.Com, offering real estate, personal finance and consumer journalism, and a backshop, the Deadline Newsroom.