ARMs Get More Attention as Interest Rates Continue to Drop

Adjustable-rate mortgages are getting more attention from borrowers who are taking advantage of declining interest rates. As mortgage market expert Dan Green notes on the Mortgage Reports blog, mortgage rates for all loan products have dropped but ARMs are leading the pack downward.

Mortgage rates have fallen

The average mortgage rate for a 5/1 ARM in June 2011 was 3.41 percent, compared with 4.22 percent a year earlier, according to HSH.com. "Mortgage rates for 'short-term' products such as the 5-year ARM are falling faster than rates for longer-term products including the 30-year fixed. The 30-year is more susceptible to changes in inflation rates," writes Green.

A 5/1 ARM gives you a low interest rate for the first five years of the loan. After that period ends, the interest rate resets based upon an index such as the LIBOR. Many borrowers choose hybrid mortgages such as the 5/1 ARM because they plan to move or refinance their house before the initial rate period ends.

But this could be a risky strategy since the housing market is still trying to recover. Many homeowners who planned to refinance or move have found themselves stuck with ARMs they can't get rid of because their homes have lost too much value.

Use a loan calculator

There are various terms for ARMS and you can use a loan calculator to compare different loan products. While a mortgage payment calculator can give you an idea of what your principal and interest would be, it is important to remember that other expenses would go into the monthly payments, such as insurance and property taxes.

After using an affordability calculator to determine how much loan you can afford, begin gathering quotes from several mortgage lenders. Look for a lender who will take the time to explain the various mortgage loan products available to you. They should also be able to help you understand the risks involved with getting an ARM that will reset in a few years. Some homeowners may be ready to wade back into the ARM waters, but you must take time to determine if this is the right loan product for your needs.