Adjustable-rate mortgages (ARMs) are only about 10 percent of the market today, yet I would guess that perhaps half of all new borrowers would select an ARM if they understood them. Fear of the unknown and the risks associated with the unknown generate a safety-first knee-jerk, which is to retreat to the fixed-rate mortgage (FRM) that has no interest-rate risk.
On May 27, the zero-fee rate on a 7/1 ARM was 3.375 percent, or 1 percent lower than the rate on a zero-fee 30-year FRM. This translates into a monthly payment difference of $57 per $100,000 of loan amount. Over the seven years for which the initial ARM rate holds, the cost to the ARM borrower relative to the FRM borrower would be more than $7,000 less per $100,000 of loan amount. That is a significant b