ARMs Gain Clout Loan Officers See Steady Escalation

The Daily Herald

When Mike Ansani bought a $780,000 house in Chicago's Lakeview neighborhood, he chose not to lock in a conventional mortgage, even though its rate was a low 5.5 percent. Instead, he picked a 5-year adjustable-rate mortgage at 4.5 percent, and estimates he saves about $400 to $500 a month.

He plans to stay in his current home five years, until his children are out of high school.

"I move a lot," he said. "I try to look at how long I'll stay in one place and try to lock in a rate based on that number of years."

Bob Kahler, in the process of purchasing his second home and thinking about starting a family, is making the same choice.

"I'm going to be out in two years," he said. "I'm buying an investment."

Ansani and Kahler are part of a huge national trend of home buyers signing up for adjustable-rate mortgages (ARMs).

In the first half of 2004, Fannie Mae reports, new ARM loans jumped to $55 billion from $6 billion in the year-earlier period. Conventional fixed-rate mortgages dropped to $75 billion from $235 billion.

"Over the past couple of years it's been a steady escalation," said Matt Garrison, managing director of The Matt Garrison Group, a sales and marketing group within Coldwell Banker Residential Brokerage. "We sell 200 to 300 homes a year, and almost 100 percent are ARMs."

Garrison points to a younger generation of home buyers who haven't ever seen a poor housing market or high interest rates.

"We deal almost exclusively with 25- to 35-year-old buyers who are not afraid of the ARM, whereas an older demographic has a conservative outlook concerning the risk," he said. "Younger buyers view it as a numbers game and are not concerned about a high interest rate environment because they've never seen one."

Despite the inexperience of younger buyers, Garrison said they are doing the right thing.

"We explain the negatives and positives of using ARMs," he said. "ARMs make the place more affordable, especially if they are going to want a new place in five years."

ARM loans generally are made for 30-year terms and bear a fixed rate of interest for the first six months or for one, three, five, seven or 10 years, after which the lender has the right to raise the interest rate annually, commensurate with any increase in the one- year Treasury bill rate or the London Interbank Offered Rate (LIBOR) plus a premium of another 2 1/4 or 2 1/2 points. The maximum amount of the increase is limited generally to two percentage points per year or six percentage points over the life of the loan. If prevailing interest rates drop, the lender has to reduce the ARM rate, too.

Chad Shafer, 28, recently bought a $500,000 home in Lakeview.

"I went with the adjustable rate because I know I won't be living in that place longer than the loan term," Shafer said.

When he locked in his 5.125 percent rate, conventional loans were at 6 percent. Shafer said he saves roughly $400 a month. It's money that he and his fiancee can use to help pay for their wedding, which they are financing themselves.

The chief economist of LaSalle Bank, Carl Tannenbaum, said he has seen a rise in ARMs.

"The interest savings borrowers can receive by going into an ARM are important, so many have chosen to take an ARM rather than a fixed rate loan."

ARMs usually comprise 5 percent to 10 percent of LaSalle's mortgages, but over the last six months, they have mushroomed to the 30 percent to 35 percent range, he said.

There are several reasons to choose an ARM.

Ansani said his lifestyle makes his choice a wise one.

"If you were going to stay forever, you'd want a 30- or 15-year loan, if you can afford the payments. A 15-year loan reduces the amount of interest you pay substantially."

More Financial News