Home Loans: A Call to ARMs? Adjustable-Rate Mortgages, Out of Favor for Years, Are Looking Like a Deal
One of the signature loans of the housing boom--the adjustable-rate mortgage--is looking more attractive than it has in years. For some buyers, it may be an even better deal than a fixed-rate mortgage.</br></br>ARMs typically offer buyers a lower rate for a set period of years, after which rates rise or drop each year, depending on prevailing interest rates. The loans lost favor during the financial crisis, when their rates weren't much better than those for fixed-rate mortgages.</br></br>But now, as interest rates hover near historic lows, the "spread" between the rates on the most popular adjustable and fixed-rate loans is on pace to be the widest it has been in eight years, according to HSH Associates, which tracks mortgage rates.</br></br>For an ARM to make sense, a borrower has to be comfortable taking a gamble that interest rates won't rise, or that he can sell the house before they do. It is a dicey bet now: Rates have been mostly on a downward slide for the past three years, mirroring the recent plunge in 10-year Treasury rates, and seem to be about as low as they are going to get. Many economists are predicting rates will rise in coming years.</br></br>That is why ARMs make sense mostly for borrowers who expect to be in a home for a short time. "If the household is truly intending to stay only for five years, they should take the five-year ARM," says Stuart Gabriel, director of the Ziman Center for Real Estate at the University of California, Los Angeles.