What Are the Appeals of Fixed- and Adjustable-Rate Mortgages?

Tim Sickinger, Principal, Ladd Financial   

What are the most common loans these days, and who uses them?

And there are many, many types, but to be simple, there are fixed rates, which are fixed for the life of the loan, and there are adjustable-rate mortgages, which typically are fixed for the first three, five, seven, maybe ten years and then begin to adjust afterwards. Typically, you can get a lower interest rate on those adjustable-rate mortgages for that period of time.

So say Tony came to me, and you knew you were going to buy this condo, but you were pretty confident you weren't going to be there ten years from now, but you might be there six years from now. So we might say, well, we can get you half a percent better rate on a seven-year adjustable rate than we could on a thirty-year fixed-rate, and simply do the math. So if you're borrowing, you know, $200,000, and you could save a half a percent or a point — $200,000, that's $2,000 a year; if you're saving half a point, you're saving $1,000 a year.

If you had to spend that $7,000 over seven years to know that your rate was not going to increase, because that's what you'd be doing if you got the fixed rate, is that $7,000 worth it to you? And in many cases, the answer is no, I'm probably going to leave, and obviously, the statistics prove that out. People do not keep their mortgages for that period of time, normally.

Tim Sickinger is a Principal at Ladd Financial, a mortgage lending firm in Westport, CT.