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The Honolulu Advertiser
Posted on: Saturday, December 27, 2003

Adjustable-rate mortgage loans still popular

By Thomas A. Fogarty
USA Today

Adjustable-rate mortgages are thriving these days even as interest rates remain low.

According to the Mortgage Bankers Association, 27.8 percent of home loan applicants last week opted for adjustable interest rates.

That's double the proportion of applicants seeking ARMs last July. It has been nearly four years since ARMs enjoyed such a high market share.

Normally, borrowers gravitate to ARMs in large numbers when interest rates start upward or remain persistently high. Following form, a spike in interest rates last summer sparked the latest move to ARMs. What's unusual: The proportion of ARM borrowers remains high even though the 30-year fixed rate has been close to 6 percent since August.

MBA chief economist Douglas Duncan and others cite reasons for the trend:

• Bargain rates. The Federal Reserve Board's monetary policy has kept rates low on short-term borrowing. Translated to mortgages, that policy has spawned sweet deals on ARMs.

According to the MBA, interest rates on 1-year ARMs this year have been running 2 percentage points to 3 percentage points lower than rates on 30-year fixed-rate mortgages.

• Psychology. Quicken Loans Vice President Bob Walters says many borrowers who normally would seek a fixed rate yearn to recapture the absolute bottom of the market, which occurred in June.

• Home prices. Prices in many markets continue to soar. ARMs carry lower initial monthly payments than fixed-rate mortgages, and more buyers are using them to leverage income to get into their first home or buy a bigger house.

"People taking ARMs are doing it for affordability considerations," Duncan says.