Are ARMs Our Archenemy?

With fixed rate mortgages at record lows and the mortgage industry in turmoil, adjustable rate mortgages have become the scapegoat, alongside subprime mortgages, for bringing down our economic house of cards. Can it be that these alternative financing options have really been the source of the problem rather than a viable alternative to traditional fixed rate loans?

"Not at all," says Michael Sanborn, owner of Saint Lawrence Mortgage. "With fixed rate mortgages at such a low point, ARMs aren't necessarily the program of choice right now. But, they have provided decades of savings and choices for homeowners."

Looking back over the last 25 years since the arrival of the 1-year ARM, followed by additional hybrid ARM/Fixed products, the reality is that these products have provided a SIGNIFICANT opportunity for homeowners to save money. Consider that in 1993 the average 30-year fixed rate was 7.3%. The 1-year ARM was below 5%. Over the next 17 years the opportunity to refinance into a lower fixed rate presented itself at least three times at an average cost of $3000 or more.

With each refinance, the homeowner most likely restarted the clock on a new 30 year term since the monthly payment reduction from that term is also a factor most consider. The 1-year ARM based on the LIBOR index and 2.25% margin, considering all ups and downs, would have seen a peak in the low 8%s and a low in the high 3%s and an average of 6.5%. The total savings on a $200,000 loan from the adjustable rate mortgage in that period would have been over $20,000 in interest paid and refinance costs, and the homeowner would owe about $40,000 less on the home with only 13 years remaining. This is compared to the fixed rate mortgage alternative refinancing 3 times to 6.5%, then to 5.75%, then to 4.75%.

There are, of course, risks associated with adjustable rate mortgages. No one knows the future and rates can go up. But there are built in maximums, so those risks can be properly evaluated before signing the paperwork. Homeowners should consider what is in their own best interests and consult a mortgage broker to discuss all options.

"Even though ARMs are still providing substantial savings over a 30 year fixed mortgage, history shows us that we don't see many opportunities to lock in long-term fixed rates this low," says Sanborn. "But, that doesn't change the fact that adjustable rate mortgages are a logical alternative for some. Regulating these options away, as some have suggested, will not provide a more sound financial future."

Consult your mortgage broker or banker for a plan that is right for you. One group of ethical mortgage brokers has been doing just that for years. The Upfront Mortgage Brokers Association is a nationwide group whose members are committed to representing the best interests of their clients and not their own wallets. Search for a member in your area and find out what loan program will provide the most benefit to your family.