Fixed or ARM… which is the best loan for me?
By mortgage writer: Dave Leonhart

Today’s mortgage market is very confusing even for us old guys who have been around for awhile. Believe me, there are more options today than at any time in the past. It used to be that you got a 30-year fixed rate and just forgot about it… for a long time.

Here are some questions you need to ask yourself to determine whether an ARM or Fixed rate would be better for you. Also, you can checkout our Fixed vs. ARM calculator at XXXXXXXX:

Note: We highly recommend you speak to a qualified loan counselor before committing to a loan.

1.	How long are you planning on living in the house?
	If you're only going to live in your house a few years, and you absolutely ‘know' that you will be moving, an ARM can make good sense. For example, if you were planning on living in your home for three years a 3/1 ARM is a good choice.
	If you are planning on living in the home 10 or more years, we always recommend a fixed rate loan. There's just too much uncertainty over long periods to risk an ARM.
	Remember, not all ARMs are created equal. Some have quick adjustment periods (within 6-months of getting the loan), negative amortization (your loan balance actually increases) and other features which can make a big difference. Know thy ARM is the best advice here.
2.	What do you believe the interest rate environment will be during the time period you wish to live in your home?
	It is usually not a good idea to get an ARM loan in a rising interest rate environment.
	As of today, most economist and market watchers believe that we will be in a rising interest rate environment for many years. This can mean trouble if you have an ARM which adjusts frequently.
	Having said all the above, a hybrid ARM: 3/1, 5/1, 7/1 and even a 10/1 can still be a good choice if you “know” when you plan on moving from the home.
3.	How frequently does the ARM adjust
	Some ARMs adjust every month, others every six months, and many every year. This can make a big difference. If you choose an ARM that adjusts every month, you may not want that much volatility, so a fixed rate would be a better choice.
	However, if you are a savvy investor-type, you may like the flexibility of a monthly adjusting ARM due to their wide variety of monthly payment options. For example, you could pay the monthly minimum amount and invest the difference into a retirement account or other investment.
4.	Could still afford the monthly payment if rates were to rise significantly?
	This is a very important question to ask yourself when deciding on a Fixed vs. ARM loan. You can that your loan company provide you with a “worst case” scenario sheet which shows the ARM loan maxed out as high as the interest rate would take it in such an environment. If the payment scares the bajeebers out of you, stay away from the ARM.
5.	Do you understand the ARM
	Many people who have an ARM don’t understand the loan at all, especially if rates begin to head up. Some ARMs can have a dramatic shock to your payment if you have a large loan amount and interest rates rise suddenly. Generally, it’s a good idea to avoid anything that you do not understand.

Here are more basics:

As you see, there are a lot of considerations to review when comparing a fixed vs. an ARM loan, and it really boils down to your specific situation and your belief as to where rates are headed in the years you will own your home.