For years, financial advisors have told mortgage borrowers to lock in low fixed-rate mortgages. But now that those fixed rates have started to rise, some borrowers are tempted by the lower rates available on adjustable-rate mortgages. Are ARMs a smart move, or will borrowers get burned?
In the following video, Dan Caplinger, The Motley Fool's director of investment planning, looks at adjustable-rate mortgages and whether they make sense right now. Dan notes that in the past, fears of rising rates and the rock-bottom fixed-mortgage rates that were available made locking in long-term fixed mortgages a no-brainer. But now, Dan points out that ARMs are much cheaper, with interest rates 1.25 percentage points lower for ARMs than for 30-year fixed mortgages at JPMorgan Chase (NYSE: JPM ) and Bank of America (NYSE: BAC ) , while Wells Fargo (NYSE: WFC ) charges 1.125 percentage points less and US Bancorp (NYSE: USB ) giving ARM borrowers savings of 1.5 percentage points. Dan concludes that each homeowner has to decide based on personal situation, but with the average homeowners staying in a home about seven years, getting lower rates on adjustable-rate mortgages might be worth the risk.
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