Adjustable Rate Mortgages are a reasonable financing solution when Federal Reserve rates are low and capital markets trade in a narrow yield range. The ARM Fully Indexed Rate (FIR) has been lower than the fixed interest rate in a fairly static market.

When the yield curve rises and yield requirements are increasing, that's when ARM borrowers want to refinance into a fixed rate loan. The 11th district COFI index rose 1.1% in the year 2006. A $250,000 COFI ARM loan payment was approximately $230 higher in Dec/06 than it was in Jan/06.

The only way to counter ARM rate and payment increases, excluding paying off the ARM, is to add additional money to each monthly payment and pay down the loan balance. The lower loan balance is amortized at the higher ARM rate, but the payment increase is less than what it would have been if loan balance had not been reduced.

•                   Topic - A review of ARM product types.
• Sem-Annual ARM - Home purchase case study.