Here it is, the start of June, and with nearly half the year already gone mortgage rates remain in a profound funk. According to Freddie Mac, 30-year fixed-rate financing is now available at 5.62 percent while 1-year ARM start rates were priced at 4.26 percent. In addition, both rates include .6 points to be paid at closing.

Freddie Mac figures show that interest levels for 30-year, fixed-rate loans have topped 6 percent only twice this year, a two-week stretch that occurred at the end March.

How low is 5.62 percent? In June, 2003 we saw 5.21 percent plus .5 points -- the lowest mortgage rate in 45 years.

There's little doubt that the low rates we're seeing today have much to do with the spurt in home prices experienced around the country. According to the National Association of Realtors, during the first quarter, home prices fell in only six of 136 metro areas .

At the same time, NAR says that in the first quarter home prices rose 9.7 percent and that a typical home was priced at $188,800. This would all be encouraging except that it's difficult to reconcile both low rates and the way many homes are now financed. If you have low interest levels then you logically lock-in those bargain rates and buy with fixed-rate financing.

Or do you?

An odd thing is happening. Fixed-rate loans are being shunned. It's as though they have cooties or some mysterious curse. Huge numbers of borrowers are opting for adjustable-rate mortgages -- loans with low start rates but the potential for higher costs in the future.

According to figures from the Mortgage Bankers Association , a third of all loans in March (33.35 percent) were adjustables. More interestingly, these loans represented 47.35 percent of the dollar value of all mortgages.

So, it's not just that ARMs are a huge and hulking portion of the mortgage marketplace at a time when interest rates are depressed; they tend to be the bigger loans.

Why is this happening?

Someone with a given income can likely buy or refinance more with an ARM than with fixed-rate financing, because qualification standards tend to be more liberal. With an ARM it's the borrower who pays more if rates rise. In comparison, if rates are fixed the lender has more risk because it cannot get a better yield if interest levels increase, so opportunities to maximize returns are lost.

You can see the ARM trade: Lower up-front costs and easier qualification standards for borrowers willing to accept the risk of higher rates in the future. It has made great sense in the past few years to finance with an ARM because rates have generally fallen and home values have largely increased. Thus there has been an opportunity to buy an appreciating asset at little cost and with little risk.

Given little or nothing down, many buyers have been acquiring the largest home possible. If you buy a $200,000 home and the value rises 9.7 percent, you're ahead by $19,400. Stretch and buy a $300,000 home and your net worth would grow by $29,100. In this example, more is better.

This is all great and wonderful but there are two looming worries: First, home prices do not rise everywhere and certainly not when values are corrected for inflation. Just look at first-quarter home prices in such metro areas as Beaumont/Port Arthur (-6.5 percent); Canton (-4.5 percent), Cedar Rapids (-1.5 percent); Greenville/Spartanburg (-.3 percent); Syracuse (-2.6 percent) and Waterloo/Cedar Falls (-2.6 percent).

Second, even if values do rise, home costs can also grow rapidly for those who have financed with ARMs. A $300,000 loan at 4.26 percent requires monthly payments for principal and interest of $1,475. If the rate a year later is 5 percent then the monthly cost rises to $1,608. At 6 percent, the monthly payment would be $1,796. (In practice the future costs would be somewhat lower because the principal balance is being reduced each month.)

You see where this is going. Six percent is a bottom-dwelling interest level by the standards of the past five decades. It's not unreasonable to think that rates could "soar" to 6 percent -- or higher. And it's also not unreasonable to think that some of folks who are "in" at $1,475 will be "out" at $1,796.

Lenders may be using ARMs to offset future rate risk, but what about future asset values? Is it worth originating loans today which may sink lenders tomorrow? A large number of foreclosures won't look good on anyone's books, reason enough to tighten ARM loan standards.

For more articles by Peter G. Miller, please press here .