The vast majority of homeowners have lower-risk fixed-rate mortgages and that should allay some of the concerns about a housing market bubble bursting and taking with it over-leveraged homeowners' greatest possessions.

However, many homeowners who've financed with FRMs could be missing out on lower monthly payments and other financial advantages from alternative adjustable-rate mortgages that could help see them through hard times.

Eighty-two percent of consumers nationwide opted for a fixed-rate mortgage in 2003, according to data from the Federal Housing Finance Board released by the Washington, D.C.­based Homeownership Alliance, a homeownership advocacy coalition.

Alaskans, at 98 percent, had the greatest percentage of FRMs, followed by Delaware (93 percent), Oklahoma (92 percent), Texas (92 percent) and New Mexico (91 percent).

At the other end, Colorado and Michigan, both at 70 percent, originated the smallest percentage of FRMs, followed by California (71 percent), Illinois (73 percent) and Washington, D.C. (75 percent)—still relatively high numbers.

FRMs are the cornerstone of the U.S. housing finance system because they come with just that—fixed interest rates. That means the monthly mortgage payment remains the same month after month, year after year. An established monthly mortgage allows the homeowner to budget the mortgage payment over the long term.

Compared to ARMs, FRMs generally come with more stringent qualifying requirements, larger-down-payment requirements and higher interest rates. To their benefit, however, home buyers with FRMs often have a larger starting stake in their home's equity than they would with most ARMs.

Bubble-market forecasters—those who believe the sky will fall hard on home prices—say those with smaller equity stakes in their home, those with high loan-to-value mortgages, will be most vulnerable to the effects of sudden depreciation.

Bubble-forecaster critics say the documented high volume of existing FRMs is one reason that bubble forecasters sound like Chicken Littles with only skinny legs to stand on.

Most homeowners don't hold adjustable-rate mortgages, which generally initially give the homeowner a comparatively higher loan-to-value mortgage. ARMs also come with the added risk of adjustment, typically an upward adjustment that calls for a larger monthly outlay, but the loans can be valuable lifestyle loans that give a home buyer a leg up on home ownership.

"ARMs may very likely be the only way to get into the market, and, unless we have a major world threatening event, it's pretty unlikely interest rates are going to rise so rapidly that an ARM holder would have to panic about losing their property because of rising interest rates," said Linda C. Boyd, a real estate agent with John V. Pinto & Associates Inc. in San Jose.

Because ARMs carry cheaper interest rates, they generate smaller monthly payments, and buyers with ARMs can buy a larger home or a home that they might not have been able to afford with a more expensive FRM. ARMs come in a wide variety of interest-only and hybrid (fixed for a year or years before they adjust) flavors that allow home buyers time to prepare to digest the inevitable higher cost—provided the homeowner keeps the ARM. Most don't and instead use the financial leverage to move up.

Hybrid ARMs, for example, can be a good fit, because statistics reveal first-timers typically move after five to seven years when growing incomes permit the move, and growing families dictate the need for a larger home. Provided there is ample appreciation, a homeowner easily moves up with little initial stake in a home he or she knew was only a starter.

Granted, ARMs can be riskier than FRMs, and they do require some foresight and financial planning. However, especially in high-cost markets, with the assistance of an experienced broker or loan officer, ARMs can be valuable financing tools when a FRM doesn't fit. In any market they can be the difference between homeownership and tenancy.

The added tax benefit of any home loan is virtually always a better deal than paying someone else's mortgage in the form of rent.

"ARMs can be abused in the leveraging, but the problem is not so much ARMs, but rather overbidding and the general sense of panic that we are experiencing right now, where potential home buyers will bid up to 10 percent or 15 percent over the list price to get a home and end up owing more on it than it is worth," said Boyd.

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