Newspaper article THE JOURNAL RECORD

Is It Finally Time to Get an ARM?

Newspaper article THE JOURNAL RECORD

Is It Finally Time to Get an ARM?

Article excerpt

NEW YORK -- With interest rates moving higher in recent months, bringing with them the cost of borrowing to buy a home, adjustable rate mortgages have been getting more notice.

The mortgages commonly known as ARMs now comprise 30 percent of the home mortgage market, up from 25 percent last fall and 8 percent a year ago, according to the mortgage company Freddie Mac. But financial advisers say that despite the fact that ARMs are initially cheaper than fixed-rate mortgages, in the long run they probably are not the best deal for most homebuyers.

"Go with the fixed-rate if at all possible in this environment," is the advice from E. Martin von Kanel, a certified financial planner in Torrance, Calif.

At Freddie Mac, deputy chief economist Frank Nothaft said, "We expect fixed-rate mortgages to remain relatively affordable. I don't think we're going to see them spike up any time soon."

With an ARM, the interest rate is set for a specified time, such as a year, three years or five years. At the end of that period, the rate is adjusted upward or downward, and will continue to be adjusted from that point on, usually annually.

Home buyers tend to lean more toward ARMs and away from fixed- rate mortgages as interest rates rise. Five years ago, when the interest on fixed-rate mortgages hovered around 9 percent, many lenders were offering ARMs with a starting rate of about 5 percent, and ARMs had about 40 percent of the market.

The two types of mortgages differ because their rates are calculated in divergent ways. ARMs are usually tied to an index of short-term bonds, most notably the one-year Treasury bill, while fixed-rate mortgages are pegged to longer-term securities, such as the 10- or 30-year Treasury bonds. Short-term interest rates tend to be lower than long-term rates.

These days, there's only about a 1.5 percentage point difference between adjustable and fixed-rate loans. The average rate on a 30- year fixed-rate mortgage stood at 8.06 percent at the end of 1999, according to Freddie Mac. The average initial rate on one-year ARMs was 6.56 percent.

Economists expect interest rates to rise further at least in the early part of 2000, as the Federal Reserve continues its fight against higher inflation. …

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