Money Pros: How to choose between an adjustable or fixed rate mortgage  - New York Daily News Money Pros: How to choose between an adjustable or fixed rate mortgage  - New York Daily News

Saturday, May 26, 2012

Money Pros: How to choose between an adjustable or fixed rate mortgage  - New York Daily News

Money Pros: How to choose between an adjustable or fixed rate mortgage  - New York Daily News

The Money Pros are standing by to take your questions.

Q. What are the pros and cons of 30 year-fixed vs. adjustable rate (ARM) mortgages? How do I figure out which is best for me?

A. Knowing what type of mortgage is right for you is all about timing. The first question to ask yourself is: how long do I plan to stay in the home?

For buyers who have a shorter-term time horizon, an ARM may be the smart choice. An ARM has a low monthly cost for the initial term, which can be as be as short as three months, or as long as ten years.

For this period, the required monthly payment doesn't change. But after the initial term, when the loan resets, the payments can rise considerably, depending upon market conditions at the time.

While it might sound risky, the advantages to this type of mortgage can be substantial. Because your initial monthly payments with an ARM are considerably lower than with a fixed-rate mortgage, you can increase your purchasing power and potentially afford a nicer home.

Additionally, lower payments free up more income - so you can save or invest more of your money, rather than putting it towards a mortgage payment.

The downside to an ARM is that if you do not sell the home before the loan adjusts, you can be in for an unpleasant surprise.

That's why it's important not to overextend yourself when taking on the mortgage. Just because you qualify for a larger loan, does not mean you should take it

In contrast, fixed-rate mortgages are best for those who think longterm. The advantage to a fixed-rate mortgage is that it's rate and payment remain consistant.

Regardless of what happens to the economy or mortgage rates, what you pay this month, will be what you pay five, ten, 15 years down the road.

They are great for people who are risk averse and like knowing what their housing costs will be well into the future.

The downside with playing it safe, is that if mortgage interest rates were to fall to lower levels, you are locked in to the rate that was in effect when you signed up for the mortgage.

Your only option to get the new lower rate is to refinance the mortgage, which can be an arduous process. However, now happens to be a great time to lock in a fixed-rate mortgage as interest rates are extremely low.

Another negative is that while ARMs offer reduced payments at the start of the loan, with a fixed-rate you are taking on the full monthly payment from the very beginning. This can make fixed-rate mortgages initially a lot more expensive, thus pricing out some potential homebuyers.

As I said before, timing is of the essence. My advice is, if you plan to move on from the home after just a few years, then an ARM is the way to go. You can take advantage of the low-rate honeymoon period, but move on before the rate adjusts. You just must be willing to make a short-term commitment to the property, nothing more.

However, if you have found your dream home, and plan to reside there for the next twenty years, then a fixed-rate mortgage may be the appropriate choice. This type of mortgage will never surprise you. Just make sure you've found the one and are in it for the long haul.

If you are ready to take the plunge, you can lock in today's low rates for life of the loan.

Gary Malin

Gary Malin is the president of Citi Habitats, a real estate brokerage firm in Manhattan

Do you have a question for the Money Pros? Send it to Phyllis Furman at

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