"I am trying to choose between a 3/1 adjustable-rate mortgage at 4.625 percent and a fixed-rate mortgage at 5.875 percent, both 30 years. I don't expect to be out of my house within three years. What is the best way to make this decision?" Whether the adjustable-rate mortgage (ARM) or fixed-rate mortgage (FRM) turns out better depends on what happens to interest rates in the future, which no one knows. Shoppers faced with this decision should ask themselves, "Is this a risk worth taking," and "can I afford to take it?" The best way I know to deal with these questions is by determining what will happen to the rate and payment on the ARM if market interest rates change in ways that you specify. This "scenario analysis" provides a measure of the risk if rates increase, and the benefit if ...
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