How to choose between FRMs and ARMs?

Because there's such a wide variety of fixed and adjustable rate mortgages, there's no simple answer.

The primary benefits of a fixed-rate mortgage are that you always know what your mortgage payment will be, and you're protected from interest rate increases. Those two facts alone make fixed-rate mortgages more appealing to someone who's living on a fixed income or tight budget.

The main benefit of an ARM is that the introductory interest rate is low and, consequently, so are the payments. You run the risk, however, of having your payments jump if interest rates unexpectedly skyrocket.

What you want to do is compare the fixed-rate interest with a worst case scenario for the ARM and see which is better for you.

The following are some things to look for when you compare the two:

Generally, you should choose the fixed-rate mortgage if:

  • the ARM you're considering doesn't have a rate adjustment cap
  • you'd be unable to refinance an ARM before, or at the end of, the introductory rate period
  • you wouldn't be able to afford the increased payments once your ARM's interest rate begins to increase

Generally, you should choose the ARM if:

  • you can get one with a 1% - 1½% rate adjustment cap
  • you can (and will) refinance before, or at the end of, the low introductory rate period
  • you're certain that your finances could handle an increased mortgage payment

Above all else, we recommend that you consult with a reputable mortgage person or a financial advisor before making a final decision.