The catch? Given that rates are currently at or close to historic lows, there is a good chance that rates will adjust upwards after that.
Before signing up for an ARM, you need to be sure that you can weather a worst-case scenario. Almost all ARMs have a lifetime cap, which limits how high the rate can go over the life of the loan (such caps typically are set at around 12% today). You should also be sure that your ARM has a periodic adjustment cap, which limits each rate hike (often to around 2%).
Ask yourself how you would fare if the rate on your loan hit its ceiling. Remember you have $3,361 set aside (hopefully earning a decent return) that you can use to help weather higher payments. So even if you move after six or seven years, you may still come out ahead with an ARM.
That said, ARMs probably aren't a good idea if you are likely to stay in your home for the long term, or if you have any trouble making the initial payment on your loan. In the leadup to the credit crisis, many buyers used ARMs to buy houses they couldn't otherwise afford -- and they are suffering now.
"People were asking what is the smallest amount per month that it will take to get me into this house," explains Jay Brinkermann, chief economist for the Mortgage Bankers Association. "They didn't have the financial flexibility to cope when the rates adjusted."
The bottom line: The benefit of a fixed rate mortgage is that you know what you will pay each month for the next 30 years. But if calculate that you are moving before the rate resets or that you can handle the worst-case scenario, then you may want to consider an ARM.
Check the mortgage section of
BankingMyWay.com for some of the latest offers of ARMs in your area.
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Peter McDougall
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