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Ask Money

Adjustable Rate Mortgage

Chris Farrell Jun 20, 2008

Question: Is there a source to which you can refer me that would state the average interest rate of the One Year T – constant maturity, over the past decade or two? We currently have an adjustable rate mortgage tied to the 12 Month Average of the One Year T, Constant Maturity. At present, the rate is not so bad, but we are all too aware it goes up and down. I am wondering if there may be an advantage to sticking with what we have, knowing that sometimes it will take a bigger bite out of our budget than others. In essence, if you can weather the peak interest rates, is it worth sticking with an adjustable rate for the valleys that are also part of the ride. Thanks. Brian, Pacific Grove, CA

Answer: The data is produced by the Federal Reserve Board. You can find both current and historical data at www.federalreserve.gov/Releases/H15/. Another data source with some nice tables is at www.moneycafe.com/library/cmt.htm.

I don’t dislike adjustable rate mortgages. I’ve had two, and both worked out well. But I now prefer the certainty that comes with a fixed rate mortgage. I think it’s a better financial product for most people. But not all.

In essence, the question about an adjustable rate mortgage comes down to 1) how healthy is your cash flow and 2) if the financial world conspires against you and interest rates go up sharply over several years how deeply will the higher mortgage payments affect you? You’re weighing the advantages of lower interest rate payments against the risk of higher payments. Is that a reasonable gamble for you to take?

The big advantage of a fixed rate mortgage is that you always know what your payment will be. It doesn’t matter if interest rates go up. However, if rates do tumble, you can always refinance at a lower rate.

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