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All of these things should factor into your decision
between a fixed-rate mortgage and an adjustable. But there are other
important questions to answer when deciding which loan is better
for you:
1. How long do you plan
on staying in the home?
If you're only going to be living in the house
a few years, it would make sense to take the lower-rate ARM, especially
if you can get a reasonably priced 3/1 or 5/1. Your payment and
rate will be low and you can build up more savings for a bigger
home down the road. Plus, you'll never be exposed to huge rate adjustments
because you'll be moving before the adjustable rate period begins.
2. How frequently does
the ARM adjust, and when is the adjustment made?
After the initial fixed period, most ARMs adjust every year on the
anniversary of the mortgage. The new rate is actually set about
45 days before the anniversary, based on the specified index. But
some adjust as frequently as every month. If that's too much volatility
for you, go with a fixed-rate mortgage.
3. What's the interest
rate environment like?
When rates are relatively high, ARMs make sense
because their lower initial rates allow borrowers to still reap
the benefits of homeownership. Rates could fall even further, meaning
borrowers will have a decent chance of getting lower payments even
if they don't refinance. When rates are relatively low, however,
fixed-rate mortgages make more sense. After all, 7 percent is a
great rate to borrow money at for 30 years.
4. Could you still afford
your monthly payment if interest rates rise significantly?
On a $150,000, one-year adjustable-rate mortgage with 2/6 caps,
your 5.75 percent ARM could end up at 11.75 percent, with the monthly
payment shooting up as well.
 |
How adjustable rates can rise |
|
| First year |
5.75% |
$875 |
| Second year |
7.75% |
$1,075 |
| Third year |
9.75% |
$1,289 |
| Fourth year (6% lifetime
cap) |
11.75% |
$1,514 ($639
more than first year) |
Now, let's compare this worst-case ARM scenario to
a fixed-rate mortgage:
|
ARM vs. fixed mortgage as rates rise |
|
| ARM: 5.75% to 11.75% |
$57,036 |
| Fixed rate: 7.75% |
$51,600 |
| Savings with fixed-rate mortgage
over 4 years: $5,436. |
In the above case, the fixed-rate mortgage costs less
than the worst-case ARM scenario. Experts say when fixed mortgage
rates are low, they tend to be a better deal than an ARM, even if
you only plan to stay in the house for a few years.
Compare the rates
To find out what the mortgage principal and interest
would be on a particular loan you may be considering, first input
your ZIP code to get best mortgage rates in your area. Then proceed
to the Bankrate mortgage
calculator.
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