Fixed Versus Adjustable Rate Mortgages
By Robert Rosefsky, Personal Finance 8th edition, John Wiley & Sons, NY,
2002.
Which One Should You Choose?
Choosing between a fixed rate loan and aa adjustable
rate loan is one of the most perplexing choices anyone can make. With a fixed
rate loan, you know exactly
where you stand today, and where you’ll stand any number of years from
today. The fixed rate is easy to understand, and it holds no surprises for
you. The adjustable rate loan may look more attractive because it will generally
have a lower starting interest rate. And, of course, there’s always the
hope that interest rates may go down. In deed, in recent years, the have gone
down.
How To Decide
One of the simplest rules of thumb in making the choice is to
determine as best you can, how long you expect to be living in the dwelling,
with the
mortgage.
If the base rate on the adjustable loan is 2 to 3 percentage points lower than
the fixed rate that might be otherwise be available to you, and if you are
reasonably certain that you will be in the house no longer than three to five
years, then the adjustable rate loan will probably be better for you. On the
other hand, if you expect to be in the house for five to seven years or longer,
the fixed rate loan will probably be better for you. It won’t necessarily
be cheaper over the long run, but it will be more stable, and that stability
is very important for you in the overall management of your finances. Put another
way, over the long pull, you may end up having paid somewhat more in interest
but you will have gained considerable peace of mind over the long term. And
that is certainly worth considering.
One More Perk
Another feature of the adjustable rate loan should be noted:
commonly, adjustable rate loans are assumable by a creditworthy buyer. In other
words,
having an
assumable loan might make it easier for you to sell your home in the future;
if the buyer wants to take on your existing assumable loan.
How They Sweeten The Pot
Many lenders offer added attractions to their adjustable rate
plans, and new ones are occasionally introduced. There are special plans for
first-time
buyers.
There plans that allow very low down payments, with outside parties (such as
an employer) being permitted to contribute part of the down payment. There
are plans that start out as adjustable rate loans which carry an option to
switch at some later time to a fixed rate loan. And there are plans that start
off at a fixed rate but can be converted to an adjustable rate at some agreed
upon future time.
