Fixed rate vs. adjustable mortgages.

Rates on 30-year fixed-rate mortgages are currently averaging around 5%, while one-year adjustable-rate loans are nearer to 3½%, according to HSH.com. That 1½ percentage-points difference prompts the question: Should you go for an adjustable-rate loan instead? 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 usually charges a slightly 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 an adjustable-rate mortgage, or 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, the interest rate on an ARM will reset periodically to keep the rate in line with current market interest rates.

For example, a 5/1 ARM offers a fixed rate for the first five years and adjusts once a year thereafter. Most ARMs 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.

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. Source: Mortgage rates from HSH.com, the website of HSH Associates of Pompton Plains, N.J. 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.

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