Here's a column about the wisdom of fixed-rate vs. adjustable-rate loans ...

Thursday, April 20, 2006

By Scott Messina
National Realty News

Now that rates have risen from their all time lows, the number of adjustable rate mortgages being originated is on the rise. This of course, is a predictable event that follows every up-tick in rates. After all, with the prices of housing on the rise often an ARM seems like the only way for a customer to afford the same home they could with a fixed rate product only a few months ago.

However, the question you should be asking is what is in a home buyer's best interest? Since it’s highly likely rates will never be as low as they were in 2003, chances are that borrowers financing their new home purchase with an adjustable loan will likely be riding the rate trend upwards, not down. As the economy continues to heat up, it is inevitable that the indexes that adjustable-rate mortgages are tied will begin to rise. The net effect will be higher rates and payments for the very same borrowers who selected an adjustable-rate loan over a fixed rate, since they perceived the adjustable as more affordable.

Unfortunately, most home purchasers fail to realize that in as little as two to three years, most adjustable programs will actually have a higher payment than if they were to choose a fixed-rate product today. Unfortunately, this will leave many of these new homeowners with a tough choice in the upcoming years: sell their home or face an insurmountable mortgage payment.

So when are adjustable mortgages the correct choice? In a downward-moving market, so purchasers can ride their payments lower, or for a home they truly intend to keep short term. Another good time to use an adjustable is if the borrower is in an occupation that will give them large increases in income for the next several years, so their income keeps pace with the rising payments.

Messina has been in mortgage lending for more than 15 years.

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