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I was recently at a fourth of July cook out. As soon as the people found out I was a mortgage broker all sorts of questions and comments came out. The perception seemed to be that all the issues in the housing market was due to the Adjustable Rate Mortgage (ARM loans).

On the opposite spectrum I am starting to see more ARM products hit the market.

Should a consumer ever consider an ARM? Is it a good product?

For years I have always said that there is not one perfect mortgage. You need to investigate your loan options to decide what is the best product for you. During 2004-2007 every one was selling the negative amortization ARM loans. People would ask me for them because they had heard how good they were. I am sure I lost a lot of business just to the fact that I would explain why I did not think that product fit that consumers goals. Now I have sold plenty of Negative am mortgages over the years. If I think that it is the right product for my client, I will let them know about it. ....By the way not all Neg Am loans are ARMs. This post is about ARMs. I should get back on track.

Most people seem to shop for ARMs by shopping interest rate and payment. This is not how a mortgage decision should be made.

What is an ARM. On ARM loans the consumer benefits from a lower starting interest rate by taking the risk of the future market. Why because the ARM will adjust. Sometimes up sometimes down. I know everyone thinks they only go up. Not so.

There are all types of ARMs but they all have the same Characteristics. Here is list of items you need to look at when shopping ARMs.

1) INDEX - definition of an index is a financial market that both the consumer and lender can view but neither party can adjust. This is what makes the rate increase and decrease. There are many indexes, examples are 1 year t-bills, 6 month LIBOR. I have heard from clients considering options from other lenders where they were told that the index never moves higher than "x" rate. All I had to do was show them the true history to earn their respect.

2) MARGIN - this is the profit that the lender would want for investing in you vs. investing in the Index. In other words you are considered a higher risk than the 1 year T-Bill. Therefore if they are going to invest in you they want a higher rate of returns. Margins very with each loan. The lowest I have ever seen is 1.25%. The highest I have seen is 8.5%

This is how your rate is calculated when it adjust. They take the index add the margin. Thus your new interest rate. This means your rate can go up as well as down.

Now most arm loans have what are known as protection caps. This means no matter where that index goes your rate can not adjust up or down more than "x"%. For instance, a 1 year ARM with FHA say's your rate can never move more than 1% per adjustment and never more than 5% over the life of the loan.

I have to get back to work I will add more about ARMs at another time.

The national average rate on a 30 year conforming fixed loan dropped by nine basis points to settle at 6.53%. Many predict that the next trouble spot in the economy will be car loans that will begin to suffer delinquencies. That is certainly reflected in the average new car loan rates that rose up slightly to 7.06%. Bank of America completed its acquisition of Countrywide Financial (CFC) thereby becoming the largest originator and servicer of mortgages in the U.S. One hopes that the diversified areas of operations of BofA would serve as a good and important cushion as the mortgage-related problems of CFC would continue to go through a painful but eventually healthy correction phase. We will continue to pay more than a passing interest in the fortunes of the new company as it will serve as a bellwether for the health of the mortgage industry and the larger economy in general.

Hope you had a nice fourth of July.