ARMS THE ANSWER FOR SOME POTENTIAL HOME BUYERS.

Byline: GREGORY J. WILCOX 

Adjustable rate mortgages are back in vogue, courtesy of rising housing prices and personal incomes that have not kept pace.

During November, 52.3 percent of home buyers in California financed their purchase with an ARM, market tracker DataQuick Information Systems said last week. That's the first time since February 1995 that this product accounted for more than half of the home purchase market.

In November 2002, as mortgage rates were trending down, ARMs accounted for 28.9 percent of the market. The peak - 66.1 percent - came in September 1988 during another boom market of rising prices and sales and a time when mortgage rates exceeded 10 percent.

And this year's residential real estate market certainly qualifies as a booming one. Many market watchers predicted a statewide sales record in the third quarter and prices have been making annual double-digit gains for months.

Interest rates bottomed out in late June, then began trending up. But they will probably end the year under 6 percent. Not surprisingly, the popularity of ARMs increased along with rates.

Typically, adjustable rate loans carry an interest rate of 2.2 percent under the rate for a 30-year loan. But the spread does bounce around.

ARMS have always been a bit of a gamble, too, but they pay off on the front end of a purchase through lower costs and monthly payment versus a traditional 30-year fixed loan.

But by an ARM, the homeowner takes on risk as interest rates fluctuate.

DataQuick analyst John Karevoll said it's a sensible option and one that was probably under-used a year ago.

In addition to being cheaper, an ARM is easier to qualify for.

``People a year ago were choosing a fixed rate when they should have been choosing an ARM,'' Karevoll said.

That's because one important number is often overlooked during the purchase process: the length of time the buyer plans to stay in a home. A fixed rate is best if that's the place you plan to live for 30 years.

However, the typical life of a loan today is a lot shorter since homeowners tend to trade up after a few years.

And ARMs can provide a hedge against rising prices. For example, in November, the statewide median housing price was $324,000, up 16.1 percent from the same month last year.

The typical monthly mortgage payment that California home buyers committed themselves to paying was $1,478 in November. A year ago, it was $1,284. In April 1989, when prices were a lot cheaper, it reached $1,278. But interest rates were above 11 percent.

The best advice for a potential buyer considering an ARM is shop around. There are lots of loan products on the market today, including some that carry an initial interest rate fixed for a certain amount of time before adjusting. These are known in the business as hybrid mortgages.

Nima Nattagh, an analyst at FNC, which supplies real estate market information to the mortgage banking industry, said buyers should also be careful in selecting an adjustable rate loan.

Be wary of a prepayment penalty.

``It's not as easy as it was a few years ago to get in and out of a loan commitment,'' he said.