Dear Egghead: With interest rates up, I’ve heard that an ARM is a smart choice. Is it?
Answer: It depends. A regular fixed rate mortgage features the same payment for the life of the loan. By contrast, ARMs begin with a fixed rate, followed by adjustments at predetermined times — perhaps the initial rate holds for several months or even several years. Then the rate adjusts according to market rates. (By the way, the term “adjustable-rate mortgage” is synonymous with “variable rate mortgage.”)
Adjustable rates become more attractive after rate hikes as we’ve seen recently.
The big attractiveness of ARMs is the low introductory interest rate. If you might be moving on to another property after a few years, the ARM is that much more smart.’ On the other side of the coin, you’ll probably be paying a relativity high interest rate of the life of the loan, so the initial teaser rate isn’t that beneficial.
Here’s an online calculator that can help you nail down the pluses and minuses of ARMs.
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