Higher mortgage interest rates are spawning unsubstantiated claims about adjustable rate mortgages —known as "ARMs"—and home-loan consumers need to scrutinize those claims.

Interest rates for fixed-rate 30-year mortgages for conforming loans rose from a record low of an average 5.21 percent nationwide on June 12 to 6.24 percent Aug. 14, according to Freddie Mac's Primary Mortgage Market Survey.

Meanwhile, one-year ARMs rose less, from 3.54 percent to 3.75 percent, Freddie Mac said.

On Aug. 14, Boca Raton, Fla.-based Cutaia Mortgage Group wasted no time sending a nationwide sound bite via the New York City-based PRNewswire service claiming ARMs are the way to go.

"Adjustable rates mortgages have always made more sense than a fixed interest loan, but now they're making even more sense and becoming even more attractive, since fixed interest loans have become more expensive," said Anthony Cutaia, owner of Cutaia Mortgage Group.

Mortgage and real estate experts were quick to rebut the questionable claim.

"ARMs are disastrous to those consumers on relatively fixed incomes, such as teachers, police officers and just about any salaried person," said Richard Calhoun, broker/owner of Creekside Realty in San Jose.

ARMs—adjustable rate mortgages—are called adjustable rate mortgages because that's what they do: adjust. And because their rates begin so low, their rates typically move up more often than down.

Sooner or later, the monthly savings you initially enjoy likely will shrink, disappear and then bloat your monthly mortgage payment.

A $250,000 mortgage with the Aug. 14 fixed rate would cost you $1,537 a month, while the ARM would lower it to only $1,157—for the first year.

ARMs are most often based on indexes tied to Treasury bills that are issued by the U.S. government to pay for the national debt and other expenses. Most one-year ARMs are tied to the "Constant Maturity Treasury" (CMT) index, which is based on the one-year Treasury bill's activity. Other ARM indexes are based on certificates of deposit (CDs) and the London Inter-Bank Offer Rate (LIBOR) rates, among others.

To come up with the initial ARM rate, the lender will add a "margin," usually 2 to 4 percentage points, to the index.

An ARM's initial rate typically is lower than the fixed rate by about a quarter point to two points or more, depending upon the economy. Right now, almost 2-¹/2 percentage points separate them.

When the first adjustment occurs (typically from six months to one, three, five, seven and 10 years) and how often the rate adjusts depends upon the terms of the loan. After the first adjustment occurs, subsequent adjustments typically occur every six months or once a year. The adjustment period is disclosed in the loan.

An ARM also has a limit or "cap" on how high it can adjust during each adjustment period as well as how high it can adjust over the life of the loan. The caps protect you from drastic market changes, but ARMs do not offer the locked-in interest rate stability of a fixed-rate loan.

An ARM's lower initial rate can help you qualify for a larger loan or start you off with smaller payments than you'd have to pay for the same mortgage with a higher fixed rate. ARMs may be a good choice for you if you know your income will rise to keep pace with the loan rate's periodic adjustment. If you plan to move in a few years and are not concerned about the possibility of a higher rate, an ARM also could be a good choice.

"Most people move about every seven to eight years. So, the risk to them, assuming the payment and interest caps are decent, is small.

But don't forget the caveats," said Sam Gilstrap, an enrolled tax agent from San Jose.

A changing lifestyle—starting a family or sending a child to college—also can affect your ability to pay a higher rate.

"Interest rates that go up by 1.25 percent—that is a 20 percent increase in the interest rate, and that corresponds to about a 15 percent increase in the payment. If interest rates go up 1.25 percent, the typical consumer's income is not going to go up by 15 percent," Calhoun said.

Real estate writer Broderick Perkins, executive editor of San Jose-based DeadlineNews.Com, writes regularly for
The Cupertino Courier.