Adjustable-rate mortgages have been blackballed throughout the subprime mortgage crisis. Yet, ARMs are a valid option as a mortgage instrument for homebuyers who do their math properly.
Provided you can afford the home you want to buy, it's in your best interest to choose the type of mortgage that will save you the most money.
Fixed-rate mortgages have accounted for the lion's share of mortgage applications over time, but their popularity has increased significantly in the last year. In 2005, ARMs accounted for almost a third of all mortgage originations, according to historical data from Freddie Mac (FRE). Their share of the market dropped to just 12% in May, the most recent month for which data is available. That's the lowest it's been since 2001.
Consumers' decreasing interest in ARMs is probably related to the risk that owning one means you could be stuck with skyrocketing rates and plummeting home values, the way many homeowners are in places such as California and Florida.
But as the gap widens between the interest rates offered on the two types of mortgage instruments, it may be worth considering an ARM, depending on your situation.
At the start of the year, the average interest rate offered for a 5/1 ARM was less than a quarter percentage point below that offered for a 30-year FRM. (A 5/1 ARM is a hybrid ARM in which the interest rate is fixed for the first five years, followed by rate adjustments every subsequent year.) That difference has almost doubled as of last week's mortgage rate survey, which could have a significant impact on the amount of your monthly payment.
