October 2nd, 2017 7:18 AM by Jackie A. Graves, President
is the better mortgage option for you: fixed or adjustable?
low initial cost of adjustable-rate mortgages, or ARMs, can be tempting to
homebuyers, yet they carry a degree of uncertainty.
mortgages offer rate and payment security, but they can be more expensive.
are some pros and cons of adjustable-rate and fixed-rate mortgages.
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 going to be living in the house only 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 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
3. What’s the interest rate
When rates are relatively high, ARMs make sense because their lower initial
rates allow borrowers to still reap the benefits of homeownership. When rates
are falling, borrowers 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.
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
adjustable rates can rise
($594 more than first year)
of lifetime cap
let’s compare this worst-case ARM scenario with a fixed-rate mortgage:
ARM vs. fixed mortgage as rates rise during four
3.75% to 9.75%
the above case, the fixed-rate mortgage costs less than the worst-case ARM
scenario. Experts say that when fixed mortgage rates are low, like they are now, fixed
mortgages tend to be a better deal than an ARM, even if you plan to stay
in the house for only a few years.
By Lance Davis - To view
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