Which Is Better : Fixed Rate Mortgage Or Adjustable Rate Mortgage? The Answer Changes Day-By-Day.

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People often assume that because adjustable-rate mortgages "share risk" between mortgage lender and mortgage lendee, they will be rewarded with a lower mortgage rate than if they chose a comparable fixed-rate mortgage.

The chart at right proves that thinking false.

Three separate times since mid-September, 5-year ARMs priced worse than a similar 30-year, fixed rate mortgage.  It's atypical, but it does happen from time to time.

And it's also why locking mortgage rates is like running a Peyton Manning offense -- you can't call a play until you've stepped to the line and studied what's on the other side of the ball.

Before settling on a specific mortgage plan, remember that mortgage markets change daily and mortgage rates change every 3 hours, 11 minutes.  A 5-year ARM may look cheaper in the morning, but by the afternoon, it could be losing out to the 30-year fixed and -- all things equal -- it's better to take that fixed-rate mortgage at a lower rate if it's available. 

Some people would liken taking an ARM when a cheaper fixed-rate mortgage was available to getting ready to eat, only to be punched in the face right before the first bite.

See, the issue here is that, as humans, our brains are wired to shop for a product first, and then a price.  For example, if you knew you wanted to buy a 32" HDTV within a certain budget, you may buy from Buy.com USA without even realizing that a 37" HDTV was on sale dirt cheap at the same store.

Calling that audible at the line of scrimmage is something your mortgage guy can help you with -- you're not expected to know what the "daily discounts" may be, or who's selling what for cheap.  You could try to keep up, of course, it's just really tough to do -- even for us guys on the inside.

With professional assistance on your rate lock, there's a much better chance that you'll be in the right product at the right rate.  The alternative is to pay more to your mortgage lender each month and nobody likes to do that.

(Image courtesy: Bankrate.com)