Choosing Between Fixed-Rate and Adjustable Rate Mortgages

ARMs have lower interest rates and payments in the early years than FRMs but expose you to the risk of higher rates and payments in future years.

The following are reasons to select an ARM:

  • You cannot afford the payment on an FRM but you can afford the payment on an ARM and are prepared to take the risk of a payment increase when the rate adjusts.
  • You confidently expect to be out of the house before expiration of the initial rate period on the ARM.
  • While you are not sure how long you will be in the house, the risk of higher future rates and payments is tolerable and more than compensated for by the lower ARM costs in the early years.

Select an FRM if you can afford the payment and expect to have the mortgage 7 years or longer; or if you have a strong preference for payment stability.

Additional Readings:

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