More than 12% of borrowers applied for variable rate mortgages in June and July, the highest percentages since August 2007, according to new analysis from Zillow.

And borrowers using ARMs are likely affluent households with larger down payments.

Data from last year shows the median income for a borrower receiving an ARM was $165,000, compared to $91,000 for all borrowers, according to figures from Zillow. And the typical ARM borrower deposited 23.6%, while the typical overall borrower deposited 10%.

Given this, it’s likely that today’s typical ARM borrower would be able to afford higher monthly mortgage payments if rates rise, the analysis concluded.

It’s about filling that gap of higher house prices, skyrocketing fixed rates (this week the Freddie fixed rate jumped to 5.66%, almost double a year ago) and trying to find a real estate payment you won’t choke on.

I tend to see significant mortgage rate differentials between ARMs and fixed rates, which makes ARMs worth considering when the loan balance is above $647,200. These better rates tend to come from bank deposit funds and credit union deposit funds, also known as wallet ARMs.

For example, consider a borrower with good credit who buys a $1 million home with a 20% down payment. Fannie Mae’s fixed rate for an $800,000 30-year loan is 5.875% with a cost of about 1 point. The principal and interest payment would be $4,732 per month.

The rate for a 10-year ARM wallet is 4.615% with a cost of one point. This payment would be $4,108, which would save $624 per month and $74,880 over 10 years.

Tariffs are locked in for the introductory period, which can be three, five, seven or 10 years. So the trade-off for a significantly lower house payment is the risk that rates will adjust upwards after the introductory period ends. Rates can go up, down, or stay the same, based on an index (usually the Guaranteed Overnight Funding Rate, or SOFR) plus a profit margin.

ARMs also have a “lifetime cap,” or maximum rate hike over the life of the loan.

Mortgage managers using the SOFR index calculate a new interest rate every six months, amortizing the remaining balance over the number of months remaining on the loan. (Previous vintage COFI ARMs tended to have yearly adjustments.)

Say you purchased a $600,000 30-year ARM five years ago with an introductory rate of five years. Your initial rate was 4% and your principal and interest payments were $2,864 per month. Your remaining balance is $543,747.

Today’s 30-day SOFR index is 2.284%. Adding an assumed profit margin of 2.75% brings your new rate to 5.034%. Your new payment jumps from $325 to $3,189 per month because the new rate jumped more than 1%.

Most variable rate mortgages require the initial principal and interest payment to be based on a 30-year term. There are also 40-year variable rate mortgages, which are interest-only for the first 10 years.

Interest-only rates are also available for terms of three, five, seven and 10 years. This means that you will only have to pay interest for the introductory period and your loan balance will remain unchanged.

For an $800,000 10-year ARM, the rate would be 5.5% and the interest-only payment would be $3,667 per month. That’s $441 less than the $4,108 payment on a 10-year amortized ARM, which covers both interest and a small portion of the loan balance.

The qualification requirements are much stricter for interest-only loans.

The main factors to consider when considering an ARM are the points and costs, the initial rate, the introductory period, the index used, the profit margin and the lifetime cap.

**Freddie Mac rates the news: **The 30-year fixed rate averaged 5.66%, 11 basis points higher than last week. The 15-year fixed rate averaged 4.98%, 13 basis points higher than last week.

The Mortgage Bankers Association reported a 3.7% drop in mortgage applications from the previous week’s 22-year low.

**At the end of the line : **Assuming a borrower gets the average 30-year fixed rate on a conforming loan of $647,200, last year’s payment was $1,057 less than this week’s payment of $3,740.

**What I see: **Locally, well-qualified borrowers can get the following fixed rate mortgages without points: A 30-year FHA at 5.25%, a 15-year conventional at 5.25%, a 30-year conventional at 5.75% , a -balance ($647,201 to $970,800) at 5.625%, a 30-year conventional high balance at 6.125%, and a 30-year buy jumbo at 5.5%.

**Eye-Catching Loan of the Week: **A 30-year jumbo mortgage locked in at 5.25%, interest only for the first five years with no points.

*Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or [email protected] His website is www.mortgagegrader.com.*