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Trade Your Arm for a Fixed
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By switching to a fixed rate loan, you will not only reduce
your payment, you will also likely lock in an attractive
rate for as long as you own your home.
In fact, while one year Adjustable Rate Mortgages (ARMs)
currently offer tempting introductory rates averaging 5.59%,
most experts recommend avoiding them, because you could
easily find yourself facing sharply higher payments in the
near future, even if interest rates don't rise. Why? Well,
after the introductory rate expires, ARMs are typically
pegged to the one year Treasury rate (recently 5.25%) plus
2.75 percentage points, with increases of as much as two
points a year. Assuming interest rates don't change, you
would pay 7.59% in the second year (the full two point
increase) and 8% in the third year.
There are certain cases, however, where an ARM makes sense.
If you are fairly certain you'll be moving within five
years, you can save some money -- and avoid rising payments
-- with a five year ARM, recently averaging 6.62%. Such
loans offer a fixed rate for five years and adjust annually
thereafter.
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