Borrowing $200,000 through a five-year adjustable-rate mortgage (ARM) at 4.5 percent would mean monthly payments of $1,013, which would save $135 a month, vs. a 30-year fixed rate loan at 5.6 percent. Over five years, the savings would total $8,100.
After five years, the loan rate would be re-set. If the ARM rate jumps to, say, 6.5 percent, the monthly payment would become $1,231, or $83 more than the fixed-rate payment. At that hypothetical 6.5 percent ARM rate. it would take more than eight years of the higher payment to eat up the initial savings. With those assumptions, you’re better off with an ARM if your stay in the house for 13 years or less.
Thus, many homeowners would do well to choose ARMs. On the other hand, borrowers who are in secure jobs, unlikely to be transferred, and young families who intend to stay put for 20 years are good candidates for fixed-rate mortgages.