ARMs may offer lowest mortgage rates

Looking for the lowest mortgage rates you can find? An adjustable-rate mortgage might be the answer, but you need to make sure you understand the ins and outs before you apply.

Unlike a fixed-rate mortgage -- which carries one interest rate for the life of the loan, typically for 15 or 30 years -- an ARM carries a set interest rate for a much shorter period of time, such as three or five years. After that, the interest rate resets based on previously agreed to terms, often once per year.

Potential advantages

An ARM can be the best way for a consumer to get the lowest mortgage rate available. That results in lower payments at the beginning of the loan.

Therefore, people with ARMs may be able to buy larger homes than they would otherwise be able to afford. Or, they might purchase a home in anticipation of their income rising over the years, so they can afford larger payments later on.

Some people opt for ARMs if they don't intend to live in their home very long. That way, they can get into a place at a reasonable cost, then move before the loan resets.

It also means consumers can take the extra money they've saved in mortgage payments and sock away the cash in a sound investment, which allows them to rack up extra money for a bigger home when they move again.

Potential disadvantages

On the other hand, if a buyer plans to stay in his or her;home for many years, rates and payments on an ARM can rise markedly with time and;perhaps make the mortgage payment unaffordable.

It's also important to familiarize yourself with terms such as:

  • Caps. These limit the amounts that rates and payments can change.
  • Indexes. ARM interest rates are tied to certain indexes that determine borrowing costs.
  • Margins. These refer to the extra amount lenders add to the payment amount.

You can find the lowest mortgage rate for fixed-rate and adjustable-rate loans and keep track of their progress at

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