| Which is the better mortgage
option for you: fixed or adjustable?
Adjustable-rate mortgages (ARMs)
can be very tempting to homebuyers, yet they carry
a great deal of uncertainty. What if rates rise
again? That’s why more than 75 percent of
homeowners still opt for a fixed-rate mortgage.
Here are three important questions
to answer when deciding whether to choose an ARM
or fixed-rate mortgage:
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 rate adjustments
are made only every three years.
2. How frequently does the ARM adjust, and when
is the adjustment made?
After the initial fixed period, most most ARMs
adjust every year on the anniversary of the mortgage.
Some ARMs adjust every three years, based on yields
on three-year Treasury securities. The new rate
is actually set about 45 days before the anniversary,
based on the index at that time.
3. How high could your monthly payment go if interest
rates rise?
Example: On a $100,000 adjustable-rate mortgage,
there is maximum annual increase of two percentage
points and a lifetime cap of six percentage points.
Note: This is a worst-case scenario in that the
interest rate rises to the maximum 2 percent each
year. Still, you need to ask if you can afford
the highest possible payment in such a worst-case
situation.
Year of ARM Rate Monthly Payment
First year 5.75% $583.57
Second year 7.75% $713.46
Third year 9.75% $850.95
Fourth year
(6% lifetime cap) 11.75% $993.04 (up $409.47 more
than first year)
Now, let’s compare this worst-case
ARM scenario to a fixed-rate mortgage:
Interest rate during 4 years Total
payments during 4 years
ARM: 5.75% to 11.75% $37,692.24
Fixed rate: 7.75% $34,387.79 ($3,304.45 less)
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. |
