Fixed-Rate vs. Adjustable-Rate Mortgage Loans 2

On the other hand, some homebuyers are drawn to ARMs, which often feature lower initial interest rates. For example, an ARM can be a good choice for a young couple purchasing their first home; they may not have a lot of assets now, but they anticipate making more money within a few years. An ARM can let them take advantage of low rates now, and they will be able to afford a slighter higher rate in the future. And in a few years, they can refinance with an FRM to lock in a favorable rate.

Which type of mortgage is right for you? Basically, it comes down to two factors:

1. How comfortable you are with risk
2. How long you plan to live in the house

Clearly ARMs are riskier than FRMs. But taking on more risk may result in a lower rate -- at least temporarily. But if you plan on staying in the house for a long time, an ARM can be particularly risky -- and potentially confusing -- since rates will fluctuate many times over and there will be more adjustments. Conversely, if you plan to move after five or six years, you could take a 5/1 ARM, meaning the first five years are locked in (at a low rate) and it converts to an adjustable rate after that -- right about the time you plan to sell.