Generally I think that a fixed rate mortgage is a better bet than going with an adjustable rate mortgage (ARM). I say that because the fixed rate is a guaranteed rate with no surprises or risks. Of course the ARM's do have lower interest rates to start so they can save you money for the first few years. After the ARM resets though you don't know what you 'll pay and it could be several percentage points higher than what a fixed mortgage would currently give you. If you know you will move within a shorter period of time then an ARM can make more sense. On the other hand, your plans don't always work out as you'd thought.
Its a given that an ARM is going to save you on interest in the first few years over a fixed rate mortgage. After the ARM adjusts though, the rates generally go up. If you're lucky then the going interest rates will be low when your rate adjusts and you'll then have lower interest costs. Another benefit in the ARM is that the principal is decreased a the loan ages, so you have lower interest rate at the start with higher principal but higher interest later when principal decreases. For this reason I'd rather pay 3% for 15 years and then 5% for 15 than have 4% for 30 years. I wondered, if you might expect the lower interest rates early in the ARM to make up for the higher interest rates later on.
I'm going to look at some examples of how ARM mortgages might compare to a fixed rate mortgage over time. These are just examples based on example ARM mortgages I found. Different mortgages will have different terms and rates. I'm also going to make some arbitrary choices about how interest rates might change in the future, but nobody can tell what interest rates will look like 10-30 years from now.
|Refinance to 5.5%|