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For many homeowners, an 8 percent mortgage would be dandy, but not to Marlene and Jeff Cohen.

The Cohens, of West Bloomfield Township, Mich., think they can do better.They're probably right.

The Cohens are refinancing from an 8 percent, 15-year fixed-rate mortgage into a 4 percent adjustable-rate mortgage, or ARM.

Usually it works the other way around. Homeowners sign up for adjustable-rate mortgages and, when interest rates start to rise, lock into fixed-rate loans.

The advantage to this is that the interest rate on an ARM is usually lower than those offered on fixed-rate 15- or 30-year mortgages. That makes it easier for first-time buyers or those seeking large mortgages to afford the monthly payments.

The interest rate on an ARM can, and often does, rise during the life of the loan. In the Detroit area, most ARMs fluctuate according to something called the one-year Treasury Bill Index, which is released by the Federal Reserve Board.

After a couple of years, as ARM interest rates rise, many homeowners decide to convert to fixed-rate loans so they will know their monthly mortgage payments will not fluctuate.

So why would someone with a fixed payment convert to a mortgage payment that likely will rise?

The first question anyone considering an ARM should ask is when do you plan to leave the house?

If you plan to sell the house in three to five years - perhaps you know you are being transferred or plan to upgrade to a new house in that time - ARMs probably make a lot of sense.

That's because there are limits to how high, and how fast, an ARM's interest rate can rise.

Often those limits are no more than 2 percent per year with a maximum of 6 percent over the life of the loan.

That means, for example, that the Cohens' 4 percent mortgage could not rise more than 2 percent a year and could never rise higher than 10 percent overall.

At this pace, even in a worst-case scenario, it would likely take several years for an ARM's interest rate to exceed that of the fixed-rate loan you left.

"People who are in a house four years or less can rarely get burned in an adjustable rate mortgage," said Steve Conaway, president of Residential Mortgage Consultants Inc. of Northville, Mich., who provides a weekly compendium of the cheapest mortgages in southeast Michigan (six weeks, $35; PO Box 921, Northville, Mich. 48167).

In some cases, ARMs can make sense for those who plan to stay in their homes a lot longer than four years.

If inflation remains low (it's currently around 3 percent to 3.5 percent), and interest rates stay low, ARM rates also will remain low.

No one knows that for sure, and that's what makes ARMs a bit of a gamble.

Meanwhile, Jeff and Marlene Cohen, who plan to sell their home in about five years, will save about $500 a month on their mortgage payments with the lower interest rate.

"The way I look at the economy," said Cohen, a principal in Cohen Shawn Rosenthal Building Co. of Birmingham, Mich., "even if I stick it out I'll be ahead of the game."

That's because even if the Cohens' mortgage rises above 8 percent, on average they would still be ahead of their previous mortgage for at least two or three years.

"I think you need to be a bit of a gambler to refinance," said Cohen, "But I don't think you need to be much of a gambler."

This shows the savings at different interest rates even if an ARM starts to rise.



ARMs can save money

ARM rate Savings compared to fixed rate

7.5% 8% 8.5% 9%

1st yr. 4.625% $2,220 $2,640 $3,060 $3,492

2nd yr. 6.625% $696 $1,116 $1,536 $1,968

3rd yr. 8.625% ($948) $(528) $(108) $324

Net savings after 3 yrs. $1,968 $3,228 $4,448 $5,784

ASSUMPTIONS: $100,000 mortage; Comparison of principal and interest only; 4 5/8 % 1-year adjustable mortgage, 2% annual cap, 6%

lifetime cap; zero points at closing; $600 in closing fees plus title insurance; assumes worst-case scenario of maximum interest rate incrast of 2% during second and third years.