ARMs are back.

Adjustable rate mortgages, known for their home-buying clout, short-term cost savings and array of types, are enjoying a renewed popularity thanks to rising interest rates and more expensive homes, according to Freddie Mac's 16th Annual ARM Survey.

A year ago ARMs comprised only 8 percent of the conventional home-buying mortgage market. Today the share is 30 percent said Freddie Mac.

That's because, while the 30-year fixed-rate mortgage (FRM) was up Dec. 16 to 7.86 percent from 6.69 percent a year ago, ARMs rose less, from 5.55 percent to 6.45 percent during the same period, Fannie Mae reported.

With an ARMs' lower initial rate you can qualify for a larger loan and a home you perhaps couldn't afford or qualify for with a FRM. You'll also pay less, at first, for an ARM compared to a FRM on the same mortgage.

In November, the difference between 1-year ARM rates and FRM rates was 1.3 percentage points for a $100,000 mortgage. That amounts to an initial year ARM savings of $1,080 on the $100,000 ARM loan, compared to the same FRM loan. The savings is larger, $1,618, over the first three years of a 3/1 ARM and $1,846 over the first five years of a 5/1 ARM, Freddie Mac said.

ARMs can be as many as 2 percentage points cheaper than a FRM, depending upon the economy, and if an ARM's index rates falls, so does your monthly mortgage.

ARMs are also a good choice even when the rate is on the rise, if you know your income will rise to keep pace with the loan rate's periodic adjustments. An ARM could also be a good choice, if you plan to move in a few years, say before the ARM reaches it's ceiling or, if it has a longer low-rate front end, before it adjusts for the first time.

Faced with the rising costs of housing, more and more consumers are opting for ARMs with longer initial rates, particularly the 5/1 ARM, which Freddie Mac says is the industry's second most popular ARM behind the 1-year ARM.

"On average, owners tend to relocate within 6 years of purchasing a house, so ... longer ARMs could well serve for as long as you remain in your home. Look for an ARM offering an interest rate at least one-half percentage point below what lenders ask for a conventional 30-year fixed-rate mortgage," reported Consumer Reports in it's September, 1999 article, "Home runs: Strategies for today's hot housing market".

Wayne, PA-based Jack Guttentag, "The Mortgage Professor," offers the Comparing an Adjustable-Rate With a Fixed-Rate Mortgage Calculator to let you compare ARMs with FRMs and calculate your savings.

The Federal Reserve's "Consumer Handbook on Adjustable Rate Mortgages" poses questions you should consider about ARMs.

Can my payments increase even if interest rates generally do not increase? Read the small print. Some ARMs are designed to rise even if FRM rates do not.

"Another part of the savings comes through introductory "teaser-rate" pricing. Lenders discount the initial interest rate to attract home buyers," said Michael Schoenbeck, senior financial analyst at Freddie Mac.

In November the initial rate for a 1-year conforming ARM was about two percentage points below the equivalent fully-indexed rate.

Published: December 24, 1999

Use of this article without permission is a violation of federal copyright laws.

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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.

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