Rising Rates Make ARMs More Appealing to Buyers

Suddenly, the real estate community finds itself twisting a few ARMs.

Hoping to stave off the chill that higher interest rates could cast on the region’s fiery housing market, many agents and mortgage brokers have begun using adjustable rate mortgages to keep deals hot and clients moving.

“In some cases it’s the only way we’re going to save a loan now,” said Ted Grose, director of consumer research and economics for the California Mortgage Brokers Assn.

“People are skittish about the higher fixed rate. It doesn’t matter that 6% is still a great deal,” he added. “You have no choice but to advise them to take a more serious look at adjustables, just to calm their nerves.”

In the last month or two, demand for fixed-rate mortgage loans has been sinking, thanks to interest rates that have risen sharply, to 6% or more from a generational low of 5.21%.

The Mortgage Bankers Assn. of America on Wednesday reported that the number of applications filed for mortgage loans dropped nationwide last week to its lowest level in more than a year. Refinancings took the biggest hit, falling to 55% of all new requests, down from 72% a month earlier, said the trade group.

Mortgage rates for a 30-year fixed loan dipped to 6% from the prior week’s 6.37% but brokers said consumers were still longing for the 45-year lows they saw in June.

“It’s a psychological thing for people,” said Ramon Russo, a Glendale-based mortgage broker. “They see the rates creep up and get nervous, like they won’t be able to afford the home they want. I have to show them that using an ARM they can actually qualify for more house.”

With an ARM, a loan starts out with a very low rate, which after a set period converts to a variable interest rate that adjusts to market conditions. The average interest rate for a one-year ARM was 3.44% last week. But while the starting rate could allow buyers to qualify for a bigger loan, they face the risk of much higher payments later. For example, the monthly payment on a $300,000 mortgage at 6% is $1,798 but at 3.4% it’s $1,337.

Some economists, however, said the rising use of adjustable rate mortgages was a precursor to a weakening market and, if consumers weren’t careful, financial trouble.

In Southern California last month, 34.5% of all home loans were ARMs -- which compared with roughly 18% nationwide -- and the percentage was the highest for the region since April 2000, according to DataQuick Information Systems, a real estate research firm based in La Jolla.

“With such a wide variety of ARMs being pushed right now, the consumer has to be extremely careful about reading the fine print,” said Nima Nattagh, director of research for FNC Inc., a mortgage consulting firm in Costa Mesa. “It can be easy to overreach just because someone says you can afford to borrow more. What happens to the rate after those first few honeymoon years is the real concern.”

Eric and Sierra DiGiorgio are willing to take their chances.

The West Hollywood couple has been scouring neighborhoods for a home in Los Angeles for the last two months. Their price limit in early June was $650,000, but when interest rates skipped to nearly 6.5% they told their real estate agent to search for homes less than $600,000 -- “for comfort’s sake,” said Eric DiGiorgio, 40, an engineer.

He said they hadn’t considered an ARM loan before “because the fixed rate was looking so good.” But now “we’re really concerned about monthly payments, so we have to be open to other types of loans.”

The DiGiorgios have qualified for a larger loan than they’re comfortable with -- as much as $700,000 -- by going with a five-year adjustable rate mortgage.

“We have a little wiggle room now, and that’s nice,” Sierra DiGiorgio, 41, said. “Maybe another bedroom, a better neighborhood or another garage. Who knows?”

Herbert M. Sandler, chairman and chief executive of Goldenwest Financial Corp. in Oakland, said the growing interest in adjustable rate mortgages was predictable given the rising fixed rate.

“It’s our opinion that ARMs usually work out better for the consumer no matter what,” he said, noting that the typical homeowner would pull money out -- or refinance -- a property within the first three years and relocate within the first seven. “But they always become more popular when rates go up.”