[Hank Palumbo] of Mortgage Bankers South said the ARM has carved a niche in the market from three groups: short-term borrowers, some mortgage refinancers, and borrowers wanting to qualify for a higher loan amount.

"The fixed-rate loan continues to be the consumer's preference, but the more sophisticated borrowers understand that the adjustable rate loan could benefit them," said [Bruce DeSimone] of Security Federal Savings and Loan Association. Monthly payment comparisons show that consumers might save $700 to $2,000 in the first year on monthly payments because the interest rate on an ARM can be 2 to 2.5 percentage points less than those on fixed-rate mortgages.

On this, he said, the rate is fixed at 8 3/8 percent for the first three years, and then the loan begins to adjust each year. Monthly payments through the third year on a $100,000 mortgage would be $760.70, or less than for the current fixed-rate mortgage.