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Should I Take an Adjustable Rate Mortgage?
By Ed Hlavac, CTX Mortgage

Compare the following examples of a fixed rate mortgage and an adjustable rate mortgage:

Example
30 Year Fixed Rate
Amortized
$300,000 @ 6% = $1,798
Interest-only
5/6 ARM $300,000 @ 5% = $1,610 $1,250
Monthly Savings:    $188   $548
Savings compounded @ 2% for 61 months = $11,853 $31,264

If Index value triples:
5 Year ARM balance @ 61 months = $275,023 @ 8% =                    $2,123
Minus fixed payment $1,798
Net increase:                $325
Savings divided by increase: $11,853 / 325 = 36.4 months

5 Year ARM, interest-only balance = $300,000 @ 8% =                    $2,000
Minus fixed payment $1,798
Net increase:                $202
Savings divided by increase: $31,264 / 202 = 154.7 months

But because labor costs are a primary component of inflation:
$5,000 monthly income @ 5% annual salary increases = $6,381 in 61 months. Much more than the mortgage increases. Real estate statistics say that you will have moved or refinanced by year number seven.

The best price on the wrong product can cost you thousands of dollars! Whatever loan you choose, you are betting on future performance. You just know the outcome of the fixed rate loan.


Ed Hlavac
ed.hlavac@ctxmort.com