Here's part five of our series on the 12 financial rules that should (or shouldn't) be broken:
Rule No. 5: Always go with a fixed-rate mortgage -- especially when interest rates are rising.
Verdict: Thumbs down. Even when rates are rising, you can save a lot every month by going with an adjustable-rate mortgage -- if you plan to move before the rate changes.
With a hybrid 5/1 ARM, your rate is fixed for the first five years, after which it adjusts annually. Rates on a 5/1 ARM are running almost one percentage point lower than rates on a 30-year fixed-rate loan. So, for instance, you’d pay $1,266 a month for a 5/1 ARM on a $250,000 loan at 4.5%, versus $1,403 for a 30-year fixed-rate mortgage at 5.4%. With the ARM, you’d save $8,220 in payments over five years and pay off almost $3,000 more in loan principal.
But if you stay in the house longer than five years and the rate on the ARM rises to 7%, your monthly payment would jump by $397 -- making it $260 more than the fixed-rate loan. One way to avoid that risk is to go with a hybrid 7/1 ARM, currently 4.9%, which locks in your rate for seven years.
What did they just say? I read that three times, and I'm still missing it. I think I need a bigger calculator.
My take on this is mixed. As with the rule last time, there's not one answer here that's "always" right, so I'd agree on that point. However, I would advise doing the math both ways, considering how long you'll be in the house as part of the equation, and evaluating your temperament (can you bear the "risk" of a potential rate increase?) as you decide. I guess this is what they're really saying, so I think I've talked myself into agreeing with them.
Comments