When Jeff and Kim Askew were shopping for a loan to buy their first home, they had a choice to make — go with a fixed-rate mortgage or an adjustable-rate mortgage, or ARM.

        “We were going to do whatever got our payments down,” said Mr. Askew, 25, a Dallas real estate analyst.

        He was leaning toward the fixed-rate version.

Jeff and Kim Askew chose a fixed-rate mortgage for their home instead of an adjustable-rate deal. (Dallas Morning News photo) | ZOOM |

        “I was uncomfortable with an adjustable-rate mortgage just because of the risk involved,” he said.

        In the end, one clear-cut reason led the Askews to go with a fixed rate: It was worth their money.

        And now is a great time to be locking in a rate on a fixed-rate loan, analysts said, because the rate “spread” — or the difference between fixed- and adjustable-rate mortgages — isn't wide enough to make taking on an ARM worthwhile.

        “I'm a big ARM guy, but I'm putting people in fixed rates today,” said Jim McMahan, division vice president and senior loan officer at CTX Mortgage in Dallas.

        “It's becoming a fixed-rate market again.”

        This week, the average rate on a 30-year, fixed-rate loan in Greater Cincinnati was 8.02 percent, compared with 7.34 percent for the one-year ARM — an ARM whose rate is fixed the first year but can change annually thereafter. The difference: just 0.68 percentage point.

        A year ago, the rate difference was 1.51 percentage points, 8.06 percent versus 6.55 percent.

        “The current gap between fixed-rate mortgages and one-year adjustable-rate mortgages is the narrowest it has been since at least March 1983,” said Keith Gumbinger, analyst at HSH Associates in Butler, N.J., which publishes mortgage information.

        There are several reasons that's happening.

        First, the Federal Reserve's rate increases to ward off inflation and recent data indicating that the economy might be slowing has led many bond market investors, who influence mortgage rates, to think Uncle Sam is winning the war against inflation.

        “Almost all of the inflation premium which drove up fixed-rate mortgage prices has now been let out of the market,” Mr. Gumbinger said.

        Second, most mortgage rates are priced in relation to the 10-year U.S. Treasury note, whose yields have been falling.

        The benchmark for fixed mortgages, the 10-year Treasury, has seen yields decline 24 basis points (0.24 percentage points) over the preceding eight weeks, but the benchmarks for ARMS are mixed, said Greg McBride, financial analyst at Bankrate.com in North Palm Beach, Fla., which follows consumer interest rates.

        The one-year Treasury is virtually unchanged, but other measures used by lenders to govern ARMs continue to show increases each month, Mr. McBride said.

        Thus, the spread between fixed and adjustable rates continues to narrow, he said.

        The bottom line: Rates on ARMs aren't low enough to make them worthwhile when you consider the risk, analysts said.

        ARMS are essentially short-term fixed-rate mortgages.

        The longer the fixed-rate period, the higher the interest you'll pay for that period.

        At the end of the fixed period, the interest rate changes in accordance with the value of a specified economic indicator called an index.

        “Adjustable-rate mortgages do not currently provide a rate low enough relative to fixed (-rate) mortgages that would compensate for the risk of higher rates in the future,” Mr. McBride said.

        Home buyers planning to remain in their new home a long time ought to lock in a fixed-rate loan now, analysts said.

        “Interest rates probably don't have much more space to improve, especially given the fact that energy prices just continue to rise,” Mr. Gumbinger said.

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