The Smart Way to Use Adjustable-Rate Mortgages

The share of adjustable-rate mortgage applications for the month of December is nearing a low point the industry hasn't seen since 2001, but ARMs are unlikely to become a thing of the past, even though they can cause problems for homeowners who aren't financially disciplined.

ARMs are mortgages in which the interest rate can change, and payments are tied to an index such as the rate on U.S. Treasury bills. ARMs offer lower initial rates than fixed-rate mortgages to compensate the homebuyer for taking on the risk that rates could rise.

ARMs are down this week to a 9.8% share of total mortgage applications activity, from 10.4% the previous week. That's higher than in April 2001, the lowest point this decade, when it was a 7.4% share, but that low level didn't last long then -- by the same week of April 2002, ARMs had shot up to 16% of mortgage applications. The highest share of ARM applications this decade was 36.6% in March 2005, according to data from the Mortgage Bankers Association. ...