First Person: When to Choose an Adjustable Rate Mortgage

Yahoo Contributor Network

Having an adjustable rate mortgage (ARM) has been great in recent years. Mine is more than a decade old, and, as interest rates have declined in the past few years, so have the monthly payments.

If I were taking out a mortgage today, though, my inclination might be to opt for a fixed-rate loan, since it seems to me more likely that mortgage rates, which are already on the rise, will continue to go up over the next few years than to go down. Even so, ARMS might make sense for some home buyers (or some homeowners looking to refinance an existing mortgage). Here are three instances when I believe that an ARM might be a good choice (assuming all other costs, such as points, are the same) even at a time when interest rates are moving up.

When Income Is Rising

The initial interest rate on an ARM generally will be lower, sometimes much lower, than on a fixed rate loan and, as a result, the initial monthly principal and interest payment on an ARM typically is well below that for a fixed rate loan of the same length. For example, according to the real estate site Zillow (, as of July 1, the average mortgage rate for a 30-year, fixed rate mortgage was 4.125%, while the average rate on an ARM with a fixed rate for the first five years was 2.635%. Based on these rates, the monthly principal and interest on a fixed rate loan of $100,000 would be approximately $485, while the monthly principal and interest on the ARM initially would be about $402. The lower monthly payments on the ARM might make this loan the best choice for a home buyer who expects her income to grow substantially during the fixed-rate period of the ARM and for whom the initial higher payments on a fixed rate loan are a challenge financially.

When Ownership Is Expected To Be Short Term

An ARM might be a good option for a homeowner who does not expect to own his home beyond the fixed-rate period of the loan. Typically an ARM's initial rate is fixed for at least a year and sometimes for as long as seven years. If a homeowner expects to sell his home before the interest rate on his ARM begins to change, then an ARM's lower payments might make this product a financially savvy choice.

When Initial Savings Are Sufficient

An ARM also might work for a home buyer who expects to live in the home beyond the fixed-rate period of the loan, if the initial savings from lower payments are sufficient to offset projected payment increases if interest rates rise. This calculation is tricky, since it requires making assumptions about interest rates years in the future and how long the home buyer will own the home.

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