Here we go again, folks. The LIBOR ARM is on a roll. I first wrote about this mortgage product in January 2002 and again in April. Everyone knows that fixed rate mortgages are at historical lows and millions of homeowners are saving money by refinancing. But as short-term rates continue to fall, the temptation of taking out an adjustable rate mortgage increases.

It seems that the LIBOR ARM is the most attractive of the myriad of adjustable rates available. For those who are unfamiliar with the LIBOR, let me explain.

LIBOR stands for London Interbank Offering Rate. Basically, the LIBOR is the interest rate that European financial institutions charge each other for funds. Many American lenders offer adjustable rate mortgages that are tied to the LIBOR index. This wouldn't normally be newsworthy - there are lots of different types of ARMs available. The thing that makes the LIBOR index interesting is that the One-Month LIBOR rate is hovering at about 1.38 percent. As far as adjustable rate indexes go, that's pretty low. And most LIBOR ARMs are offered without charging points. (One point is equal to one percent of the loan amount in cash at closing. Be careful about paying points on any mortgage.)

Here's the next thing: Various mortgage brokers and lenders are offering LIBOR-based adjustable rate mortgages with a margin as low as two percent. The margin is the amount that is added to the index in order to determine the interest rate.

You see where I'm going with this? Add 1.38 percent and two percent and you have what's called a "fully indexed" rate of 3.38 percent. Even with fixed rates hovering as low six percent, a fully indexed ARM at 3.38 percent is hard to turn down.

You'll notice that I continue to use the term "fully indexed". This is very important because many adjustable mortgage programs lure you into the loan with a low introductory, or "teaser" rate. As soon as the introductory period is over, your rate spikes up. A fully index rate isn't discounted - as the LIBOR index increases or decreases, so will your LIBOR ARM rate.

I was hot on this product back in January when the LIBOR index dropped just below two percent. With a two percent margin, the LIBOR mortgage rate was four percent - still very cheap. The index edged slightly lower all year, and made a big drop after Alan Greenspan's recent half point cut in the Federal Funds Rate. So the folks that took out a LIBOR at four percent a year ago are now enjoying a rate at less than 3.50 percent today.

What's the risk? Well, it is an adjustable rate so it can and will eventually increase. But let's look at its history:

Published: November 20, 2002

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, the president of PMC Mortgage Corporation in Alexandria, VA, is a mortgage columnist whose work has appeared in numerous consumer, real estate, and mortgage publications. Mr. Savage welcomes your questions for possible use in this column, however because of the volume of mail received, Mr. Savage cannot answer questions individually.