Adjustable Rate May Be Better if You Plan to Move

by Center for Personal Finance editors

With mortgage rates still relatively low, many people assume a fixed-rate mortgage is the best option when buying a house. But, depending on your situation, adjustable-rate mortgages (ARMs) have attractive features that you might want to consider.

If you plan to stay in your home for a long time, it makes sense to get a fixed-rate mortgage. That way you lock in the current low rates.

But if you know you won't stay in your home very long, consider taking out an ARM. ARMs typically have lower rates than fixed-rate mortgages, often one to two percentage points lower.

With an ARM, you lock in the current low rate for one, three, or five years. After that time, your rate will be adjusted annually, meaning your monthly payments could increase, perhaps a lot.

But if you aren't planning to be in your home for more than five years, why not make your monthly payments lower? It won't matter if the rates rise after the initial fixed term because you'll have sold your home by then. And, if you get the lower rate ARM, you may be able to purchase a larger home.

If you plan to stay in your house longer than five years, but money is tight right now, you also might want to consider an ARM. You'll have more money free during the first few years for living costs. But you'll need to be sure that your money situation will improve in the next few years. If not, once your initial rate term is up, you'll be saddled with payments you may not be able to make.

Use this calculator to help decide which mortgage may be better for you.

October 27, 2003