For some borrowers, it’s time to consider the ARM option again

For a while there, getting a fixed-rate mortgage was a no-brainer. Now it's ... well ... a brainer.

The differences in rates between fixed-rate and adjustable-rate mortgages were negligible a couple months ago. Borrowers didn't think twice before picking the fixed-rate option. Now it's time for some to consider ARMs. They're not for everyone, but they deserve at least a cursory look.

ARMs are becoming more compelling each week, and this week is no exception, as the most popular fixed rate went up while adjustable rates went down.

The benchmark 30-year fixed-rate mortgage rose 4 basis points, to 6.41 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.4 discount and origination points. One year ago, the mortgage index was 6.2 percent; four weeks ago, it was 5.88 percent.

The benchmark 15-year fixed-rate mortgage was unchanged, at 5.87 percent, while the 30-year jumbo, for loans more than $417,000, fell 12 basis points, to 7.43 percent.

ARM rates declined. The benchmark 5/1 adjustable-rate mortgage fell 9 basis points, to 5.68 percent, and the 1-year ARM fell 7 basis points, to 5.49 percent.

The 5/1 ARM has an introductory rate that lasts for five years, and then it adjusts upward or downward annually. It's the most popular type of ARM. At the beginning of the year, the 30-year fixed and the 5/1 ARM had the same rate in Bankrate's weekly survey: 6.14 percent. Now the initial rate on the 5/1 ARM is almost three-quarters of a percentage point lower.

"What this is, is a return to normalcy," says Dan Dowling, president of United Mortgage Capital Corp., in Altamonte Springs, Fla. For years, he says, ARMs sported lower rates than fixed-rate mortgages. The gap started narrowing a couple of years ago, and there were times last year when the 5/1 ARM had a higher rate than the 30-year fixed. That was unusual.

Time to consider an ARM?

Now we're returning to a more typical state of affairs, with ARM rates that are noticeably lower than fixed rates. "What it should underscore is that there are a lot more refinancing opportunities than most people would think," Dowling says.

According to the Mortgage Bankers Association, the message is sinking in. In the last week of 2007, ARMs accounted for 2 in 20 mortgage applications. Last week, they were 3 in 20.

Bob Walters, chief economist for Quicken Loans, says he has never had a fixed-rate mortgage on his homes. He always gets an ARM. "If you think your income will rise in the future, and you have savings, and you won't live there forever, maybe consider an ARM," Walters says. "You assume a little bit of risk and there is a payoff."

The payoff is the lower monthly payments resulting from the lower rate. The risk is that the rate will rise upon adjustment.

ARMs aren't for everyone, experts warn. Walters recommends a 30-year fixed rate loan for homeowners who are risk-averse, or have tight finances, or who expect their incomes to rise only modestly in the future.

"If you're pinched on equity, I don't think it's a good call" to get an ARM, Dowling said.

That rules out most first-time buyers, he says.