25% of Utah mortgages are ARMs

More than a quarter of all mortgage loans in Utah are adjustable-rate mortgages — loans that could put borrowers at risk as interest rates rise and push monthly payments higher.

In fact, Utah ranks No. 11 nationwide in the largest percentage of outstanding ARM loans, according to a report released this week by the Mortgage Bankers Association. In this year's first quarter, 25.8 percent of all first-lien mortgage loans in Utah were ARMs. That's up from 23.5 percent in the 2005 first quarter.

Nevada ranked No. 1 in ARM share at 41.1 percent. South Dakota was last at 10.6 percent. Nationally, the ARM share of all outstanding mortgage loans in first quarter was 25.5 percent.

Mike Fratantoni, senior economist with MBA, said ARM loans tend to show higher delinquency rates compared with fixed-rate loans. Still, Fratantoni said, states that show a high percentage of ARM loans do not necessarily have higher mortgage delinquency and foreclosure rates.

For instance, in California, 38.3 percent of mortgage loans in the first quarter were ARMs, the second-highest share of all states, but in the first quarter California ranked the lowest in foreclosures rates.

An adjustable-rate mortgage is a mortgage with an interest rate tied to an index. The interest rate can adjust up or down based on changes in the economy. The initial interest rate for an ARM is lower than that of a fixed-rate mortgage. The lower rate means lower payments, which appeal to many first-time homebuyers or those wanting to qualify for a larger loan.

But future monthly payments on ARMs can be uncertain. In recent months, interest rates on ARMs have shot up.

The five-year ARM averaged 6.32 percent this week, up from last week when it averaged 6.23 percent, according to Freddie Mac's Primary Market Mortgage Survey released Thursday. A year ago, the five-year ARM was at 5.05 percent. According to the survey, interest rates on the five-year ARM are at their highest level since Freddie Mac started tracking it on Jan. 6, 2005.

The survey noted that one-year ARMs averaged 5.75 percent this week, also up from last week when it averaged 5.66 percent. At this time last year, the one-year ARM averaged 4.23 percent. The one-year ARM has not been higher since Aug. 3, 2001, when it averaged 5.77 percent, the report said.

John Norman, executive director of the Utah Mortgage Lenders Association, said ARM loans are a legitimate product, one that often allows homeowners to get into a home.

"But if they don't understand that the interest rate after the fixed period will go up or if they don't understand that as interest rates rise that their payments will also rise, that is concerning," Norman said. "What's paramount is that consumers understand what they're doing."

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