Length of stay in home key to choosing ARM

January 18, 2004|By Patricia Rivera

Experts say choosing an adjustable-rate mortgage vs. one with a fixed rate should focus mainly on how long the buyer plans to stay in a house.

If the buyer might be transferred regularly, an adjustable mortgage probably makes more sense than a long-term, fixed-rate mortgage. A buyer who doesn't expect to live in the home for 10 years also should consider an adjustable rate, experts said.

HSH Associates offers the following example: The monthly payment on a $200,000, fixed-rate, 30-year mortgage at 6 percent would be $1,199.10, which includes principal and interest. A five-year ARM at 4.93 percent would carry a monthly payment of $1,065.96, a saving of $133.14.

After five years, the 30-year loan would cost a homeowner $58,054.76 in interest, and leave the principal at $186,108.69. The ARM would cost a homeowner $47,380.54 in interest and leave the principal at $183,474.35.

After five years, however, the interest rate for the ARM could rise. If it went up to 6.93 percent, for example, the monthly mortgage payment would rise to $1,288.57, an increase of 21 percent over the former monthly payment.

"That's where the real pinch comes," said Keith T. Gumbinger, of HSH Associates. "It's a nip in your budget, and the rate could go up again."

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