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.
Fool contributor Dan Caplinger owns warrants on JPMorgan Chase, Wells Fargo, and Bank of America. The Motley Fool recommends Bank of America and Wells Fargo. The Motley Fool owns shares of Bank of America, JPMorgan Chase, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.