- The Washington Times - Tuesday, January 24, 2006

Q: With interest rates rising, should I get an adjustable-rate mort-gage loan?

A: When do you plan to move?

If you plan to stay in a home for more than seven years, a fixed-rate home loan may be best. But if you’re like many Americans, you’ll likely move before seven years are up.

Adjustable-rate home loans — so-called because monthly loan payments rise after a certain period of time — have become popular with first-time home buyers in recent years.

This initially came as a bit of a surprise to some lenders because rates for all mortgage loans hit historic lows in recent years and adjustable-rate mortgages were viewed as a product of the 1980s when buyers faced with double-digit mortgage rates. Today, adjustable-rate home loans are popular because they allow buyers to make less of a monthly mortgage payment for a certain period of time, and this can help some borrowers qualify for a larger loan.

The adjustable-rate home loans offer lower interest rates because they are linked to short-term interest rates. Fixed-rate home loans, meanwhile, are tied to longer-term interest rates.

Lenders charge more for longer-term loans because they assume there is greater risk in borrowers who take longer to pay off their home loans.

For example, in early January, a borrower could get a 30-year mortgage with a rate of 6.125 percent to 6.25 percent. A five-year adjustable-rate loan linked to one-year Treasury rates meanwhile, had a rate of 5.80 percent.

This difference is usually greater. According to the Mortgage Bankers Association, the rate for an adjustable-rate loan is as much as three percentage points less than a fixed-rate 30-year mortgage. But this difference has shrunk because of unusual events in the Treasury market, where borrowing costs for many loans are determined.

Adjustable-rate mortgages, though, have some risks; namely, when the rates for these loans adjust higher. Each loan product has a formula that determines how far and how quickly the monthly interest rate can be increased. Some of the adjustable-rate mortgages adjust higher after one year, three years, five years and seven years.

Other questions home buyers should consider include whether their monthly loan payment will be reduced if rates go down. We’ve seen interest rates climb steadily since 2004 and Wall Street expects another couple of interest-rate increases by the Federal Reserve in coming months. But some parts of the financial markets — special interest-rates futures contracts traded by bond traders — have signaled that rates could actually come down by year end or early 2007.

Which comes back to the question of how long you plan to live in your home.

For anyone buying a home and planning to live in it for less than seven years, the adjustable-rate loan may be a good choice because the assumption is that the homeowner will move before the interest rate will climb.

“If you will be in and out of the house, then you will save money by going with a lower rate,” said Steve LaDue, president of Affiliated Mortgage in, Wisconsin. “We are not our parents. We don’t put down roots anymore,” he said.

At the same time, Mr. LaDue said that if the difference between the two rates is not that great, as was the case in early January, then it may be a good idea to go with a fixed rate. This can give you the security of knowing that at least one part of the family budget remains constant.

“You are trading off security for a lower rate,” he said.

ASSOCIATED PRESS

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