Whats Best for

Let's say that you know which direction interest rates will move. If so, you lock in low interest rates with a fixed-rate loan when it looks like they'll be rising over the next few years. When it looks like rates will go down or stay about the same, an adjustable-rate mortgage should be considered.

But you don't know the direction interest rates will take, and neither do the experts. So leave interest-rate forecasting to those who dare, and concentrate instead on what you can manage. If you're stretching and a sooner-than-expected payment hike could strain your budget, a fixed-rate mortgage is the safe bet. If not, a one- or three- year adjustable-rate mortgage is worth considering. ARMs are attractive when the spread between fixed-rate mortgages and the starting rate on the ARM is two percentage points or more, or when you don't intend to stay put more than five years.

Don't accept an ARM without periodic and lifetime caps on interest rates; typical caps today are no more than a two-percentage-point hike in the interest rate from one year to the next, and no more than a five- or six-point increase over the starting rate during the term of the loan.

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