The Smart Way to Use Adjustable-Rate Mortgages

"At the same time," Mr. Anderson of Wells Fargo says, "the [Federal Reserve] has once again embarked on a rate-cutting path in order to forestall tighter credit conditions and a slowing economy. Fed interest rate cuts are much more effective in dropping conforming ARM rates than they are at lowering 15-year and 30-year mortgage rates. This makes ARMs relatively more attractive as a mortgage option, even though past ARM holders are still facing higher reset rates."

For disciplined homeowners, an ARM is a smart financial decision, say some mortgage brokers. "By investing the monthly savings of an ARM, which can be substantial, in a safe place like a high-yielding savings account, you can build a cash cushion in times of emergency," says Jay Dacey, a Plymouth, Minn.-based mortgage planner. "By choosing an ARM, you can save money to invest and have a lower rate, and if rates do lower in five or seven years, refinance into another ARM."

The Park Avenue Mortgage Group in Manhattan has not seen a decrease in the number of applicants it has had for ARMs, according to its CEO, Ellen Bitton. "Our business is typically 50/50 for adjustable-rate mortgages and fixed mortgages, and we haven't seen a change." But she points out that affluent people often take on adjustable-rate mortgages.

Bitton says one of her former clients recently told her that he will come back to her soon for a refinance, because his ARM with a 4 1/8% rate will soon be adjusting upward to a 6 1/8%. "I will tell him that his adjusted rate will probably be similar to what he can get in a new mortgage," she says.

The average contract interest rate for one-year ARMs decreased last week to 6.00% from 6.03%, while 30-year fixed-rate mortgages decreased to 6.05% from 6.10%, according to MBA data released yesterday.