Should I get a Fixed or adjustable rate mortgage?
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Choosing an adjustable or a fixed debt instrument should be based upon the current mortgage rates and the amount of time you intend to stay in your home.
If you know that you will be moving in 5 years, you may be better off taking a 5-year fixed ARM loan rather than a fixed. That is a loan that stays at a fixed rate for 5 years and then begins to adjust to fit the current market rates. Because ARMs generally offer lower interest rates than fully fixed mortgages, this can offer a ½ to a full 1 point discount and save you a couple hundred dollars per month. You should be careful about the possibility that you may want to stay in your home for more than 5 years however, because your rates could go up dramatically after the 5-year introductory period.
Another reason that someone may opt for a variable interest loan is if they are in the market to buy a home during a high-interest market. If rates are near historic highs (9-10%), you are going to be better off by selected a variable ARM to take advantage of when the rates will eventually fall.
As an example of what not to do however: A disturbing trend that has been observed recently (2004) wherein people have are turning to adjustable rate mortgages (ARMs) because housing costs are so inflated that they otherwise cannot afford the home. In San Diego County for example where less than 10% of the population can now afford the median home, it was recently estimated that 68% of all new mortgages are some form of an ARM. This is not a healthy market, since clearly 68% of owners will not be turning those homes over (by choice) within 5 years. This is an example of optimizing to fit one's pocket book today, at the expense of tomorrow and this should be avoided at all costs. If the person made this choice assuming that everything will work itself out rather than seeing the writing on the wall, there is a good chance they will find themselves underwater when the market begins to shift.
So, choosing an Adjustable Rate Mortgage (ARM) or fixed rate can be as simple as looking at the current market conditions and gauging your own personal term of ownership of the home. Be careful to avoid the trap of choosing the wrong debt instrument at the wrong time however because you're stretching too far to afford your home.
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