When to consider an adjustable-rate mortgage?

Adjustable-rate mortgage (ARM) - Introductory interest rate is lower than the typical industry standard. If the loan is repaid or the home is sold prior to the interest rate adjustment period, you will pay less than if you had a fixed-rate.

If you intend to keep the mortgage for just a brief period of time (especially if you are considering selling your home within the fixed-rate segment of the ARM), you'll be shielded against any rises in interest rate.

mortgage questions

Mortgage rates have been at extremely low levels for years, and probably will continue to that way in 2015 and 2016. If you can deal with a potentially larger payment, you could save some money by taking a chance on lower rates down the road.

First-time homeowners like how ARMs keep the payment relatively low on large loan amounts. Having said that, adjustable-rate mortgages may also be a little more puzzling and volatile, which could turn into a problem.

Fixed-rate Mortgages

The interest rate permanent throughout the life of the loan. The risk is when interest rates are in a decline, you will start spending more than you had to if you needed to.

The terms for fixed rate mortgages are available in 30 years, 15 years, 20-years and even 10-years. The borrower's loan is paid-in-full when the term is complete.

With a longer-term fixed mortgage, the payment is lower and the shorter terms of 15 and 10 years have larger payments. The advantages of a shorter-term mortgage are lower interest rates in comparison with longer-term 20 and 30-year loans. Also, you'll pay less mortgage interest paid to the lender as well with a short-term fixed mortgage.

If you plan on staying in your home for much longer than 5, 7 or 10 years, a fixed-rate mortgage is a safer loan product to get if you want your payment to stay the same. Currently, with record low interest rates, there's very little reason for homeowners to choose an ARM over a fixed-rate mortgage. There are some scenarios where an ARM is better like if you need to keep your debt-to-income ratios at a certain level. Consult with a licensed mortgage advisor about this and other aspects.

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