Fixed or Adjustable Rate

After all exotic mortgages are laid aside, the choice for most home buyers comes to this: Should you get a fixed- or adjustable-rate mortgage?

The standard fixed-rate, fully amortizing home mortgage—with its preset, life-of-the-mortgage, monthly payments covering principal repayment and interest—came into being during the Great Depression and fueled the enormous expansion of homeownership in the decades following World War II. Its beauty was— and is—the peace of mind homeowners get from pre-

With an ARM, you, the borrower, assume the risk of rising rates, and you stand to benefit should rates fall.

dictable monthly payments. Taxes, utilities and other costs of homeownership may rise, but principal and interest payments remain the same. An obvious drawback, of course, is that if rates fall, the holder of a fixed-rate mortgage cannot capture the benefit of a new, lower rate except by refinancing.

The increasing reluctance of lenders to make fixed-rate mortgage loans in a climate of rising interest rates in the late 1970s led to creation of the adjustable-rate mortgage (ARM). With an ARM, the interest rate you pay rises and falls along with other rates charged throughout the economy. Put another way, you, the borrower, assume the risk of rising rates, and you stand to benefit should rates fall.

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