Look Before You Leap Into Jumbo ARMs

With rates so low, most borrowers want the security of a 30-year fixed mortgage. But when getting a jumbo mortgage, that long-term safety means much higher monthly payments than an adjustable-rate mortgage would offer.

Borrowers who need jumbo loans can save hundreds of dollars a month by choosing adjustable-rate mortgages, or ARMs, which normally have lower interest rates than fixed-rate mortgages. That's why the majority of jumbo borrowers opt for ARMs.

"We still continue to see ARMs as the preferred jumbo product of choice, though fixed-rate terms are becoming more attractive," says James Campanella, residential mortgage manager at City National Bank of Florida, in Miami.

While a 30-year fixed jumbo mortgage generally has an interest rate in the 4% range or higher, a jumbo ARM could start at less than 3%.

"I've seen 5/1 jumbo mortgages as low as 2.75%," says Jason Auerbach, division manager at First Choice Loan Services in New York City.

Think Beyond Payment

Such a low rate is tempting, but borrowers shouldn't base their decision solely on rate, says David Adamo, chief executive officer of Luxury Mortgage in Stamford, Conn. With an ARM, the rate adjusts after the fixed period, which is usually five or seven years. If mortgage rates skyrocket over that period, the mortgage payments would increase substantially.

"We tell consumers to match the duration of the fixed interest to how long they expect to have the loan for," Adamo says. "Someone may be planning to live in a home for 20 years -- but may only intend to keep the loan for six to seven years."

In that case, a 7/1 ARM would be appropriate. But if you plan to stay in the home longer and don't think you'll be able to pay off the mortgage before the fixed-rate period is over, you might want to consider a fixed longer-term mortgage.

It's impossible to know what the jumbo mortgage market will be like when the introductory rate expires and the rate resets. Many borrowers were trapped in 2008 and 2009 when they tried to refinance their jumbo mortgages as jumbo lending nearly halted.

The uncertainty, coupled with low rates, has been making fixed-rate jumbos more attractive for some borrowers, mortgage experts say.

"We believe that the life span of the jumbo loan will start to creep up in years, especially at today's lower rates," Campanella says.