Adjustable rate mortgage VS. fixed

[goBigtime]

http://biz.yahoo.com/pfg/e03greenspan/

Greenspan's Call to ARMs:

Alan Greenspan's Call to ARMs Could Put You in Great Financial Danger

By Suze Orman

Greenspan's Gambit: When Federal Reserve Chairman Alan Greenspan speaks, the entire financial world listens. His opinions, policies, and cryptic hints are dissected all over the world, and have an immediate and often dramatic impact on the course of the monetary markets. If Warren Buffett is the Oracle of Omaha, Greenspan is the Wizard of Washington.

That's why I was so shocked a few weeks ago when Chairman Greenspan let loose with a real doozy: he asserted that homeowners could save a ton of money if they took out an adjustable rate mortgage instead of a fixed rate mortgage. For his evidence, he pointed to what would have happened if you had taken out an ARM 10 years ago. Back in 1994, fixed rate mortgages were around 8 percent and adjustables were in the 6 percent range. Since then, rates have been on a strong downward trend: a 30-year fixed rate currently carries a 5.5 interest rate, while an ARM can be 4 percent or lower. So if you took out that adjustable 10 years ago, every time the ARM rate came up for an adjustment - back then you had your ARM rates reset every 12 months based on the then current rate - chances were slim that your payment would increase, since rates were falling, not climbing.

Now I am a big fan of history, but I cannot believe Chairman Greenspan used the past to make his argument. All due respect, Mr. Chairman, but as the investing maxim goes, "Past performance is no indication of future performance." And my friends, when it comes to your mortgage - typically the biggest investment of your life! - it's the future path of interest rates that matters, not the past.

And let's be very clear. Rates right now are at historical lows. There is just one way for rates to move: up. Plain and simple. They could stay where they are for a few months, or even a year or two. But at some point rates will go up. It's just the natural cycle. We are near the end of the downward cycle. It's just a matter of time before the up cycle kicks in. If you are holding an ARM and rates start rising, you are going to see your ARM payments head north, too. And that could make a mess of your financial house.

So before you go off and follow the Wizard's advice, let's make sure you understand the risks of taking out an ARM and how to smartly navigate the world of mortgages.

Here's what we're going to cover:
(the rest is on the link above)

There's no shame to their game.