Over the past several months, I have been answering various questions from readers asking me about adjustable rate and fixed rate mortgages. Here's a quick menu of what rates you might find today with no points or origination fees:

• 30 Year Fixed Rate - 6.50 Percent
• 5/1 ARM - 5.25 Percent
• One Year ARM - 4.75 Percent
• Monthly LIBOR ARM - 3.75 Percent

Okay, now let's check out the monthly principal and interest (P&I) payments for a loan balance of $300,000.

• 6.50 Percent - $1,896
• 5.25 Percent - $1,656
• 4.75 Percent - $1,565
• 3.75 Percent - $1,389

Adjustable rates are lower rate because the risk of higher rates in the future is put upon the borrower. A borrower absorbs the risk but gets the benefit of a lower rate and payment. Take the difference between the fixed rate and the LIBOR ARM - $507 per month. Assuming the LIBOR remains at 3.75 percent for the next 12 months, the borrower saves $6,084. Not bad.

Now let's look at principal curtailment. At 6.50 percent, the $300,000 loan balance drops to $296,647 in 12 months - a gain of $3,353 in equity. At 3.75 percent, the balance drops to $294,484 - a gain of $5,516.

Not only is your payment lower by $507 per month, you also gain an additional $2,163 in equity.

Here's another example: Over five years, you would fork out $113,760 in mortgage payments if you take the 6.50 percent fixed rate. The 5/1 ARM, which is fixed for the first five years, would cost you $99,360 - $14,400 less.

After five years, the fixed rate would drop the mortgage balance to $280,833. The 5/1 ARM, at 5.25 percent, would drop the balance to $276,448 - an additional $4,385.

So the bottom line here folks, is that lower interest rates not only provide lower monthly payments, but also build equity faster. Don't get me wrong - fixed rates are very attractive and a great option for anyone thinking of holding the loan for a very long time. But if you think you might sell in a few years, get a good loan officer to present you with a menu of adjustables. It certainly can't hurt to know what's available.

Published: July 17, 2002

Use of this article without permission is a violation of federal copyright laws.

, the president of PMC Mortgage Corporation in Alexandria, VA, is a mortgage columnist whose work has appeared in numerous consumer, real estate, and mortgage publications. Mr. Savage welcomes your questions for possible use in this column, however because of the volume of mail received, Mr. Savage cannot answer questions individually.