Are Adjustable-Rate Mortgages Smart With Fed Hikes Coming?; ARMs offer lower rates, hybrids some security, but long yield slide over.(A)

Byline: LAURA MANDARO

The long secular decline in interest rates since the early 1980s seems over. The Federal Reserve is expected on Tuesday to tip off markets that rate hikes aren't far off. That's spurred higher mortgage rates in recent weeks.

Would you be a fool to take out an adjustable-rate mortgage today?

Not necessarily.

By taking on some of the interest rate risk normally held by the lender, ARMs can be one to 2 percentage points below 30-year fixed-rate mortgages. So even if short-term rates rise by 1 percentage point over the next year, as many economists expect, an ARM that adjusts upward in 12 months could still cost less than the rate on that fixed-rate loan you considered today.

Plus, many loans let you to lock in a rate for up to seven years before adjusting. They can include interest rate caps, such as a limit to how much the yearly rate can move up or down and how much the rate can change in the life of the loan.

Of course, with each of these security precautions, the lender charges a slightly higher rate. But it's still almost always lower than the ultimate security blanket -- a 30-year fixed-rate loan.