Adjustable rate mortgages are good choices for people who do not plan on staying in the home long term. You can get an adjustable rate that does not adjust for the first year, the first three years, the first five years, the first seven years, or the first ten years.

Once the initial term is over, the loan will typically adjust every year and will adjust to a rate which equals an index rate (like the LIBOR or Treasury) plus a margin (think "profit" margin, usually 2.5% - 3.0%), rounded up to the nearest .125%. ARMs are also "capped" meaning the adjustments are limited in advance. For example, on a 7/1 ARM with caps of 5/2/5, after the first seven years your loan will not be able to increase by more than 5% (first adjustment cap), and will not be able to increase more than 2% (annual cap) each year thereafter. Additionally, your loan will never be allowed to increase more than 5% from the start rate (lifetime cap).

Given today's low fixed rates, I strongly encourage my clients to opt for the fixed rate loans unless they can afford the long term risk associated with ARM loans and understand the risk/reward of both loan types. Fixed rate options provide stability and are least likely to cause you problems down the line.

Call John Desmond, ENG Lending, at 888-407-1592 to discuss all of your mortgage questions.