When my wife and I chose an adjustable-rate mortgage over the fixed-rate variety 11 years ago, it was a gamble. How nice, then, to have our judgment validated the other day by Federal Reserve chairman Alan Greenspan.

In a recent speech to the Credit Union National Assn., Greenspan said a homeowner with an ARM for the past 10 years could have saved tens of thousands of dollars compared to the cost of a fixed mortgage.

That’s because ARM rates averaged 0.5 to 1.2 percentage points lower than fixed rates during much of that period. Moreover, as interest rates gradually declined, homeowners with fixed mortgages paid big fees to refinance.

But that’s all in the past. What’s the best advice for a homeowner now? ARMs worked great during the past decade as interest rates fell, but is a floating rate worth the risk when you can lock in a fixed rate at today’s near 40-year lows?

All about ARMs

Although there are many varieties of adjustable-rate mortgages, the typical one starts at a low “teaser” rate, then adjusts to a new rate every 12 months. Usually, the new rate is figured by adding 2.75 percentage points to the current yield, or interest rate, paid by one-year Treasury notes.

Today, new ARMs charge about 3.6 percent for the first 12 months, compared to 5.7 percent for 30-year fixed mortgages. Older ARMs that are adjusting this month, as mine did, will charge about 4 percent for the next 12 months — the 1.25 percent one-year Treasury rate plus 2.75 percentage points.

Most ARMs allow adjustments to go up or down by no more than 2 percentage points a year, or a total of 6 points over the life of the loan, which is usually 30 years.

So the new ARM issued at 3.6 percent today could, in the worst case, go to 5.6 percent in 12 months, 7.6 percent in 24 months and 9.6 percent in 36 months. As I’ve said many times, you might kick yourself if your ARM went that high and you could have locked in a fixed loan at today’s 5.7 percent, nearly four points lower.

Fixed vs. adjustable

Let’s compare two mortgages of $100,000 each. The fixed-rate loan charges 5.7 percent every year, for a monthly payment of $580.40.

The adjustable-rate charges 3.6 percent the first year, for a payment of $454.65 per month; 5.6 percent the second year, costing $581.77 a month; 7.6 percent the third, for $719.6 a month; and 9.6 percent the fourth, for $865.47 a month.

In this worst-case situation for an ARM, it would take about 33 months before the total cost of the ARM exceeded that of the fixed loan. That period would be longer, of course, if the monthly saving on the ARM were invested at a good return.

Obviously, if the ARM rose to the 9.6 percent maximum and stayed there, the fixed loan would be cheaper over the long run.

But what are the odds of that? One-year Treasuries would have to go to 6.85 percent or higher and remain there. Since January 1991, they’ve done that only 2 percent of the time.

More importantly, though, for an ARM to adjust to a rate above the 5.7 percent you can get today on a fixed loan, the Treasury note would have to be at 2.95 percent or higher. Since 1991, it’s been above that for 78 percent of the time. The exception has been the past three years.

Today’s low rates

If the next 13 years look like the last, you’d probably be better off with a fixed-rate mortgage.

This seems to conflict with Greenspan’s claim that ARMs have beaten fixed loans. But it doesn’t because for most of the past decade fixed rates were a good deal higher than they are today — mostly above 7 or 8 percent. Indeed, most experts expect the Fed to begin raising rates sometime this year if the economy continues to improve, driving ARM rates up.

So with apologies to Mr. Greenspan, I think fixed mortgages look pretty good.

But in weighing an ARM versus fixed loan, there are a couple of other things to consider.

First, since ARM payments start low, borrowers can qualify for larger mortgages than with fixed loans.

Second, the risk of bigger ARM payments down the road doesn’t matter if you won’t be in the house very long.

And finally, if your ARM rate starts drifting higher, you can refinance to a fixed loan — though you probably won’t match today’s splendid rate. Also, you could face several thousand dollars in refinancing costs.