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Your Choice: Fixed or Adjustable-Rate Mortgage?

Apr 25, 2014

Mortgage rates have risen almost a full percentage point since hitting record lows about a year ago. At the same time, the spread in the rates between adjustable loans and fixed-rate loans has widened.

The average U.S. rate on a fixed, 30-year home loan ticked up to 4.33 percent from 4.27 percent last week, according to mortgage buyer Freddie Mac. By comparison, the average rate on a five-year adjustable mortgage stood at 3.03 percent.

But is an adjustable-rate mortgage right for you?

Here are some things to consider when weighing whether to take on an adjustable-rate mortgage:

— LENGTH OF HOMEOWNERSHIP

Banks typically offer adjustable-rate mortgages with a fixed interest for five, seven or 10 years. After that initial period, the loans could reset to a higher rate, sometimes multiple times.

That's why it can make good financial sense to use an ARM when buying a home that you plan to sell before the initial fixed-rate period ends, say in less than five years. In that scenario, you'd pay a lower interest rate that if you had a 30-year, fixed loan and then sold the home within five years.

"If the homebuyer plans on staying in the home for a period longer than the initial rate lock, consider a fixed-rate loan, particularly while we're still enjoying historically low mortgage rates," says [CFP Board Ambassador] Don Grant, a [Certified Financial Planner™] in Wichita, Kansas. Read more >

Associated Press / ABC News
By Alex Veiga
April 25, 2014 


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