ARMs for the Short

The shorter the length of time you plan to own your property, the more likely you should select an ARM. You can usually find an adjustable that will cost you less than a 30-year fixed-rate loan if you plan to sell within seven years. Take a look at 5/25 or 7/23 (sometimes described as a 30/5 or 30/7) adjustables. (Exceptions to this rule occur when the yield curve inverts.)

These types of ARMs fix your interest rate and monthly payments for the beginning five or seven years of the loan. Then they periodically adjust to keep your rate in line with the market. Even this limited type of adjustable may cut your rate by .5 to 1.5 percent as compared to a fixed-rate mortgage. For instance, at a time when 30-year fixed-rates were at 7.25 percent, I saw several 5/25 ARM plans with start rates as low as 5.75 percent.

For each $100,000 borrowed, payments for a 7.25 percent 30-year fixed-rate loan cost $682 a month. If you could select a 5/25 at 5.75 percent, your payments would drop to $583 a month (per $100,000 borrowed). Although the rate differences between 30-year fixed-rate loans and various types of ARMs change daily, it pays to look. When you plan to sell (or refinance) within seven years, an ARM might limit your risk at the same time it reduces your monthly payments. And, as your income goes up, you should be able to manage any increases in your ARMs monthly payments until rates come back down.

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