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Homebuyer's Choice: Fixed Rate or Adjustable Mortgage?

May 21, 2013Jonathan Clements, Director of Financial Education, Citi Personal Wealth Management

Rates on 30-year fixed-rate mortgages are at historic lows--but your initial interest rate would likely be even lower if you opted for some sort of adjustable-rate loan. Does that mean you should go for an ARM, as adjustable-rate mortgages are often called?

Like many things in life, it depends.

Imagine your paycheck fluctuates, perhaps because you work on commission or you own a small business. Alternatively, let's say you just don't like uncertainty. In these cases, you may want to go for a fixed-rate mortgage, where your monthly principal-and-interest payment won't change. Most fixed-rate mortgages are for 15 or 30 years. A 30-year loan will have a lower monthly payment than a 15-year mortgage, but charges a somewhat higher interest rate.


On the other hand, suppose you have a secure job with a steady paycheck and you feel you can handle the risk that your monthly payment could rise sharply. In that scenario, you might consider some type of ARM. An ARM may also make sense for folks who believe their incomes will rise in the years ahead or who expect to move or refinance fairly quickly.

The reason: An ARM will often charge a lower interest rate initially. But these mortgages also come with added risk. After an initial term, which might be just one year or it could be five years, the interest rate on an ARM will reset periodically to keep the rate in line with current market interest rates.

ARMs typically have both a periodic rate cap and a lifetime cap, thus limiting the amount the interest rate can increase each adjustment period and over the life of the loan, though larger increases may be allowed at the first adjustment. Given the possibility that mortgage rates could rise from today's historically low levels, you might calculate what your ARM payments would be if rates go up--and then weigh whether you could handle the higher payments.

INVESTMENT PRODUCTS: NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE


The information provided is solely for informational purposes. It is not an offer to buy or sell any of the securities, insurance products, investments, or other products named.

This material is derived from sources believed to be reliable, but its accuracy and the opinions based thereon are not guaranteed.

Borrowing may not be suitable for everyone. You should understand the terms and conditions of the loan before committing.

Citigroup Inc. policy does not permit clients to use the proceeds of a home loan to invest in the securities or related markets. Your Financial Advisor may receive compensation in connection with this lending program. Affiliates of Citigroup Global Markets Inc. may earn fees in connection with the funding, origination, and sale of a loan.

A Citigroup Inc. relationship does not have to be established or maintained to obtain the products or pricing offered as part of the Home Loan Program at Citibank. Home equity programs not available in AK. A default (stopping monthly payments) on a mortgage could result in the loss of pledged real estate, securities or both.

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©2013 Citi Personal Wealth Management is a business of Citigroup Inc., which offers investment products through Citigroup Global Markets Inc. ("CGMI"), member SIPC. CGMI and Citibank, N.A. are affiliated companies under the common control of Citigroup Inc. Citi and Citi with Arc Design are registered service marks of Citigroup Inc. or its affiliates.

 

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