Does an Adjustable-Rate Mortgage Make Sense Now?

Fixed rate mortgage rates are higher than last year. Should you go with an ARM?

May 25, 2014 at 9:55AM

Last year, the threat of Federal Reserve tapering of its bond-buying activities sent mortgage rates soaring. But adjustable-rate mortgages are still at very low rates. Does it make sense to go with an ARM, and do Bank of America (NYSE:BAC), Citigroup (NYSE:C), and other lenders benefit from them more than from fixed-rate mortgages?

In this following video, Dan Caplinger, The Motley Fool's director of investment planning, discusses the pros and cons of adjustable-rate mortgages. Until last year, fixed-rate and adjustable-rate mortgage rates were very close to each other, giving borrowers less incentive to take the risk of adjustable-rate mortgages. Now, though, there's a big short-term benefit to using an ARM, but with the risk that interest rates will rise and boost your monthly mortgage rates. Dan warns that many homeowners got themselves in trouble in the mid-2000s by relying on low monthly payments that later rose. Bank of America, Citigroup, and other mortgage lenders stand to benefit either way, as they tend to get paid based on transactional fees rather than the actual interest income. As long as you're ready for inevitable rate increases down the road, though, an ARM is a reasonable way to save money in the short run, especially if you believe that the Fed will keep short-term rates low.

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Dan Caplinger owns warrants on Bank of America. The Motley Fool recommends Bank of America and owns shares of Bank of America and Citigroup. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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