New York’s Best Mortgage Programs:

The Adjustable Rate Mortgage (ARM), of course, is mortgage whose interest rate can go up or down. Fixed rate mortgages, by contrast, lock in your rate for the life of your loan in New York– there’s no need to guess as to where the rate will be next year or in 15 or 30 year.

At first glance, an ARM looks like a good deal next to a fixed rate. The average ARM rate nationwide is usually less than the average fixed-rate. So far that looks easy, right?

But there’s a gamble involved, and ARM buyers can get burned as a result. With an ARM, your payments are lower for the first three to four years, and will stay low — provided interest rates in general don’t skyrocket. If they do, the lender typically will adjust your ARM rate upward by a maximum of 2 percentage points a year, and a max of 6 percent over the entire loan period.

An ARM in New York that starts out at, say, 5.80 percent can increase to 7.80 percent in the second year, to 9.80 percent in the third year, and to 11.75 percent in the fourth year. Over that period your monthly payment would shoot up from $582 to over $1,000.

On the other hand, when most interest rates are in a decline, such as during a recession, that tends to keep ARM rates low.

How rates are computed
Few homebuyers understand how ARM rates are computed: For the first year only, the lender uses a teaser rate to get you in the door. In the second year, he starts tying the rate to a publicly known index such as Treasury bills or the 11th District Cost of Funds… To that he adds his “margin,” usually 2.75 percent, to arrive at your ARM rate for the new adjustment period.

But that rate is capped at the 2-percent-maximum-per-year described above.

Who should get an ARM?
When should you get an ARM — or not get one?

It depends on two things:

1. How long you plan to remain in your New York home
2. The unpredictable direction of interest rates.
A family that probably won’t move again for five or more years should NOT consider an ARM at this point because fixed rates are relatively low. Better they lock up a 30-year fixed-rate mortgage at 7.25 percent to 7.5 percent or thereabouts.
However, homebuyers who believe they’ll be in their house for only four years or less will probably save money by opting for an ARM. Though their ARM rate will rise over that short time frame, the bottom line, in dollars and cents, is that the buyer’s total cost will be less than that with a fixed rate.