Homeowners with ARMs are optimistic

Homeowners with adjustable-rate mortgages worry about rising interest rates, but most believe that they will be able to refinance their loans if necessary, according to a study released today.

A survey of homeowners conducted for San Francisco-based Wells Fargo & Co. found that about 1 in 7 respondents had an adjustable-rate mortgage.

An ARM is a mortgage whose interest rate is typically tied to a short-term security such as one-year Treasury bills or the London interbank offered rate, or Libor. The borrower’s payments change over time with the adjusting interest rate.

As home prices rose during the recent housing boom, an increasing number of home buyers turned to ARMs to purchase homes. The reason: ARM rates were lower than those for traditional 30-year fixed mortgages. Lenders also devised ARM variations that gave borrowers even lower monthly payments by allowing deferment of principal and/or interest.

Over the last year, fixed and adjustable mortgage rates have crept higher. Mortgage company Freddie Mac reported last week that the interest rate on 30-year, fixed-rate mortgages averaged 6.40% in the most-recent survey period. A year earlier, the rate was 6.15%.

The Wells Fargo study found that nearly 80% of homeowners with ARMs said they were concerned about rate increases.

But more than half said they believed that they could refinance their loans. And about 20% said they were prepared for rate adjustments and didn’t plan any changes.

Last week, the Mortgage Bankers Assn. reported that the refinance share of mortgage applications increased to 45.6% from 45% the previous week.

Wells Fargo’s third annual study also found that homeowners expected their properties to appreciate, although they apparently were aware that price increases were slowing.

About 10% said they expected their home values to increase a lot, 53% said values would increase “a little,” and 27% predicted they’d stay the same. The rest expected a decline or weren’t sure.

The survey of more than 1,300 homeowners was conducted by Media, Pa.-based ICR. The margin of error was about 3 percentage points.