NEW YORK (TheStreet) -- Confounding most predictions, mortgage rates have remained unusually low this year, begging a question: Is an adjustable-rate mortgage worth the risk?
It can be, but it's likely that many borrowers focus on the wrong issue, looking at the way lower interest rates on ARMs (as opposed to fixed-rate loans) reduce monthly payments. Currently, a one-year ARM charges 2.876%, a 30-year fixed-rate loan 4.313%.
A lower payment obviously means more money in your pocket for other things. But if that's what matters to you, consider it a red flag. The ARM rate will start out lower than the fixed-rate loan, but could go higher when the annual adjustments start after one, three, five or seven years. At some point, you could pay more each month than you would if you'd taken out a fixed loan. That means if you think the monthly payment on a fixed loan would be a stretch, be very wary of taking out an ARM for the same amount.
Why, then, would you even consider an ARM? In a nutshell, not to reduce monthly payments but to reduce your overall interest charges -- assuming everything works in your favor.
Consider some numbers produced by Jack M. Guttentag, emeritus professor of finance at the Wharton School. On a $300,000 loan, he figured a 30-year fixed mortgage would charge 4%, for a monthly payment of $1,432. A five-year ARM would start at $2.635%, for $1,205 a month.