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At times, there is little difference between Adjustable Rate Mortgage (ARM) start rates and Fixed Rates. Sometimes, there are significant rate spreads between the two. In times of overall low rates, the differences tend to be minimal. Since all rates are low, there is only so much “room” between the rate level and zero. Therefore, as in the years 2002 through 2006, all mortgage rates were very low (5-6%), leaving little space to have a large difference between fixed rates and ARM's.
However, in periods of either rising and/or high rates, the difference between the two can be of serious importance, sometimes two to three per cent. This occurs because the published fixed rate must protect the mortgage lender from even further rate increases as much as possible, while the ARM lender can publish a lower discounted rate, knowing that the rate adjustment terms will allow them to increase the rate in the future, bringing them closer to market rate.
If you believe you will keep your home and the mortgage for the long-term, you may be better selecting a 30 year fixed rate loan so you can budget properly and will not be subject to future unpleasant rate increases. Should you be unsure of how long you'll keep the real estate and/or if the difference in interest rates is small, you might also be wise to choose a fixed rate product.
In periods of rising rates or high fixed rates, you might benefit greatly from an ARM. But – you must examine the ARM parameters and terms carefully. To compare the two choices properly, use the following analysis: