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The term "adjustable rate mortgage" (ARM) has gotten a fairly bad rap over the past few years, as the housing market and banking industries have suffered. But, are there situations where an adjustable rate loan is preferred to a fixed rate?
For some borrowers, an ARM is a good option. Some ARMS will not adjust for several years. ARMs are actually on the rise. It has been reported that 10 percent of Bank of America's loans in March, 2011 were ARMs.
Other factors to ponder when mulling over a fixed rate or an ARM include:
- How long will you own the home? If you expect to upgrade or move within a few years, an ARM that does not adjust for a few years may be an excellent choice.
- What is the outlook for interest rates in the near future? Get some interest rate forecasts and determine if the market conditions look favorable.
- How do your finances look? If you can handle some fluctuations, then maybe an ARM is the best choice.
Of course, there is always a risk with ARMs that interest rates could skyrocket, driving up your mortgage payments. And, if you plan to move within a few years, you are taking a gamble that the market conditions will allow you to sell the home -- and sell it at a favorable price.
Of course, fixed-rate mortgages come with higher interest rates than ARMs, but some home buyers prefer the stability a fixed rate offers.
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