Best Mortgage Quotes Have No ARM in Them--Usually

When mortgage loan rates are expensive, it makes sense to consider signing up for an ARM. Rates are likely to drop, and then your monthly payments will fall, too.

But, over the last year, America's had the lowest mortgage rates that most people can remember. And most experts expect them to rise in the near future. So--unless you're one of a select few--signing up for an ARM makes no sense.

Mortgage Quotes Mostly ARMless

Earlier this year, Freddie Mac released its 26th Annual ARM Survey. And it showed precisely what one would expect: only 3% of purchase-money conventional mortgage loans in 2009 were ARMs. That was the lowest proportion since the surveys were established in 1982 and contrasts with 1984 when 62% of home purchase loans were ARMs.

Frank Nothaft, a Freddie Mac vice president, and its chief economist, commented:

Fixed-rate lending has dominated the home mortgage market over the past year because of the 50-year low in interest rates for this product and the comfort that a fixed principal-and-interest payment assures the consumer. While ARM lending has been limited, those consumers who prefer an ARM generally have many lenders and products to choose from. The most offered product in the survey was the 5/1 ARM, where more than four out of five ARM lenders quoted rates.

Best Mortgage Rates Could Be Hybrid?

Mr. Nothaft referred to so-called "hybrid" mortgage loans. As the name implies, these combine characteristics of both ARMs, and fixed-rate mortgages. They have a fixed rate for a set period at the beginning of the loan and then change to an adjustable rate. So a 3/1 ARM has a fixed rate for three years before it "floats" with the market, a 7/1 has a fixed rate for seven years, and so on.

That means that anyone planning to move or refinance before their fixed-rate period expires could consider joining the three percent who took out an ARM in 2009. After all, according to ING Direct, Americans on average keep their mortgages for only seven years, so a 7/1 ARM might suit most borrowers.

Advantages of Hybrids

Hybrid ARMs are generally cheaper than fixed-rate mortgages. This chart from Freddie Mac compares rates across a variety of loan types. They also tend to be widely available. Freddie Mac says that 84% of lenders offer 5/1 ARMs, and--because monthly payments are lower--borrowers may find it easier to qualify for this type of mortgage loan.

ARM Yourself with Facts

Although hybrid ARMs can offer real benefits to the right borrower, they are more complicated than straightforward, fixed-rate mortgage loans. So it is important to understand fully terms and conditions.

Of course, it's essential to understand terms, and conditions before entering into any financial obligation. But the first step when finding a home loan of any sort is to find the lowest mortgage rates. Compare them now.