October 2011 : Adjustable-Rate Mortgage Rates Scrape Rock-Bottom

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With adjustable-rate mortgage rates available under 3 percent, it's a terrific time to look at ARMs.

Click here to get a mortgage rate.

What Is An Adjustable-Rate Mortgage?

An adjustable-rate mortgage (ARM) is a mortgage for which the interest change can change over time. ARMs are given with an initial "teaser" rate, and a math formula that dictates your interest rate after the teaser rate expires.

Teaser rates can be reserved for a period of 3 years; 5 years; 7 years; or, 10 years and, in general, the longer the initial teaser period lasts, the higher the accompanying mortgage rate will be.

For example, 5-year ARMs generally come with lower rates than a 10-year ARM. This is because your mortgage rates can't change during the initial teaser rate period, and the longer that period last, the more risk you pass back to your lender.

With more risk comes higher rates. This is one reason why 30-year fixed rate mortgages are almost always more costly than ARMs.

Here's how most ARMs work:

1. The loan begins with a initial interest rate that remains for up to 10 years
2. When the initial fixed rate period ends, the loan adjusts based on a pre-set formula
3. Every 12 months thereafter, the loan adjusts again, based on the same pre-set formula

In 30 years -- like a fixed rate loan -- the ARM is paid in full.

The formula by which a loan adjusts is (Some Constant) +  (Some Variable) = (New Rate) where the constant is usually in the range of 2.25-2.75 and the variable is equal to some well-known rate (e.g.; 12-month LIBOR, 1-year Treasury).

As a real-life example, if the constant is 2.25 percent and the variable is 0.812 percent, your adjustable-rate mortgage would adjust to 3.062% this week.

Click here to get a mortgage rate.

ARMs Are Growing In Popularity

In the mid-2000s, ARMs were commonly used as an affordability tool; a way to help homeowners stretch their housing dollar. When housing values fell, however, homeowners pulled back.

According to Freddie Mac data, homeowners using ARMs fell from a high of 33 percent in January 2006 to a low of just 2 percent in January 2009. Only recently has ARM use started to climb.

And for good reason, too.

Adjustable-rate mortgages are at their lowest points in history. Conforming 5-year ARMs and equivalent FHA ARMs are available at under 3 percent. This is a full percentage point below comparable 30-year fixed rate pricing.

For homeowners with jumbo mortgages, the savings are even bigger.

Multi-million dollar 5-year ARMs can now be found under 3 percent -- a huge variance against the current rates for the jumbo 30-year fixed. Jumbo ARMs of all sizes are "on sale".

Check Adjustable Rate Mortgage Rates In Your Area

ARMs don't fit everyone, but if you can be comfortable with the "adjustable" nature of an adjustable rate mortgage, today is among the best times in history to pursue that strategy.

See what an adjustable-rate mortgage can do for you.

Click here to get a mortgage rate.