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Despite risks, adjustable-rate mortgages have advocates

PHILADELPHIA — Fixed mortgage rates remain below 5 percent, and these days fewer and fewer home buyers seem to be opting for adjustable-rate loans.

But low fixed rates aren’t the only reason that adjustables are financing just 7 percent of all home-purchase loans, according to figures from Freddie Mac, which tracks them.

“Home buyers have shied away from ARMs because they are wary of the risks … the potential for much larger payments if future interest rates are significantly higher,” said Freddie Mac chief economist Frank Nothaft.

In 2004, adjustables’ share of all loans reached a high of 36 percent. Their low point came in early 2009, when just 2 percent of all mortgages were ARMs. Nothaft said he believed the share would rise to 9 percent this year.

An adjustable-rate mortgage is a loan with an interest rate that changes. ARMs may start out with lower monthly payments than fixed-rate mortgages, but the Fed advises borrowers to consider these points:

• Monthly payments on the loan can go up, maybe by a lot, even if interest rates do not increase. And payments may not go down much, or at all, even if interest rates drop.

• You can end up owing more money than you borrowed, even if you make all your payments on time.

• An early payoff in the hope of avoiding higher payments might incur a penalty.

Peter Buchsbaum, branch manager at Gateway Funding/Arlington Capital in Horsham, Pa., isn’t a fan of adjustables, believing that, in light of low fixed rates, the risk isn’t fiscally responsible.

“I learned a long time ago that my crystal ball has stopped working,” Buchsbaum said. “I only know what now is.”

Rates will always change, he said, adding, “If my client asked me to lend them money on a shorter term because he or she felt it prudent, I would make sure there was a lifetime rate cap.”

A lifetime cap is the maximum interest rate that may be charged at any point on an adjustable-rate mortgage. For example, if an ARM has an initial interest rate of 5 percent and a lifetime cap of 5 percent, the maximum rate that may be charged is 10 percent.