Integrated calculators help you decide
Budgetary and risk constraints
The borrower's decision is subject to two possible constraints. Selection of the FRM is subject to the proviso that the initial monthly payment fits the borrower's current budget. Selection of the ARM with its lower initial payment is subject to the proviso that the borrower is comfortable with the risk of possible future rate and payment increases.
The calculator quantifies the risk by showing the worst that can happen to the rate and payment, and the earliest it can happen.
The borrower must make the final decision. The table defines the choices, which are not limited to the two shown. The borrower in this case might want to look at a 7/1 ARM, which has a slightly higher initial interest rate than the 5/1 but two more years of rate protection.
The borrower can also calculate costs over different periods to see how it affects the results -- few borrowers know exactly how long they will have their mortgage.
Next week: selecting the best combination of interest rate and lender fees.
The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.
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