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Should I opt for a low-interest, adjustable rate mortgage?

When you are in the market for a new home, you are likely encountering a few options for obtaining a mortgage. Some loans feature a fixed rate, and others are adjustable. As Bankrate.com points out, a fixed rate mortgage will provide payment security, because you know that the interest on your loan will not rise. However, low-interest ARMs often attract homebuyers due to their initial low cost.

The way most ARMs work is that initially, you receive a low interest rate, keeping your payments affordable. If interest rates fall, so will the rates on your loan, whereas fixed rate mortgage holders would have to refinance in order to get a better rate. Advocates of ARMs also note that the money saved on a mortgage payment every month could be put into savings.

However, Bankrate.com points out a few pitfalls of an adjustable rate mortgage, such as the following: 

  •        Due to the way some ARMs are structured, it is possible that borrowers will pay only part of the interest due and end up owing more money on the loan.
  •        Annual caps may not apply to the first rate change, which means your interest rate could skyrocket.
  •        Homebuyers may have trouble understanding the terms of the mortgage and what that will mean for their future finances.

Experts advise thoroughly researching your alternatives when considering an ARM. The AARP also notes that you need to factor in how long you plan to be in the home. If you plan on living there for only a few years, an ARM could be an attractive option. However, as industry leaders point out, it is hard to predict the future and where you may be five years from now.

While this information may be useful, it should not be taken as legal advice.

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