Fixed Or Adjustable Rate Mortgage?

SEATTLE - Before you buy a home, you need to borrow money. Will you go with a fixed or adjustable rate mortgage (ARM)?

According to bankrate.com about a third of all home loans these days are ARMs.

But is an ARM for you? In its May issue, Consumer Reports warns that variable-rate home loans "can be bad deals, now that short-term interest rates are rising."

A year ago, choosing an ARM meant dramatically lower monthly payments. Not anymore. ARM rates have gone up, as fixed rates have come down.

According to the latest survey by bankrate.com, the average 30-year fixed is now 5.81 percent, while the average 5-year ARM is 5.23 percent. That means the monthly payment for a $165,000 loan is just $60 a month less with an ARM ($909.09 vs. $969.19) than with a 30-year fixed.

Clearly, these lower payments are appealing, making it possible for some people to buy a house they could not otherwise afford.

But what happens if your income does not keep up with the rate increase? As Consumer Reports puts it, "if the homeowner doesn't sell and move or refinance before the rate adjustments become too onerous, they can find themselves on the edge of a financial cliff."

So, what's a home buyer to do?

"We think that most consumers who are buying a home to live in, as opposed to invest in or speculate on, are better off going after a fixed rate mortgage at this time," says Mari McQueen, a Senior Editor at Consumer Reports.

She says an ARM only makes sense "for people who know for a fact that they will only going to being in their home for a short period of time before the low interest rate expires and the new rate is set."

A type of ARM known as "a hybrid adjustable" is very popular right now because it locks in the low introductory rate for a specific period of time, such as three, five, seven or 10 years.

McQueen says these loans make sense for someone who knows "for a fact" that they are not going to be in their home for more than that set time period.

Consumer Reports says if you decide to go with an ARM, be sure to find out about the loan margin. That's the amount the lender adds to an index (such as the US Treasury Rate) to determine the total rate.

"The larger the margin," the magazine says, "the more sharply your interest rate climbs when the index adjusts." The editors say you should insist on getting this information in writing.

What are people saying about mortgages today:

Rates on 30-year mortgages edged down last week to a seven-month low. Mortgage-giant Freddie Mac reported Thursday that 30-year, fixed-rate mortgages fell to 6.3 percent, down slightly from 6.31 percent two weeks ago. It put rates at the lowest level since they were at 6.24 percent the first week of March.

Bank of Hawaii, Central Pacific Bank, Territorial Savings Bank and Wells Fargo Home Mortgages all cut their 30-year mortgage rates to 5.75 percent this week.

Most people think of a mortgage as a means to an end. After all, you buy a house, not a home loan. But a mortgage is much more than the path to homeownership. It is a financial instrument that must be managed, just like any other financial investment.