Current Mortgage Rates: Fixed-Rate or ARM?

current mortgage ratesUntil recently, the only dilemma for home loan seekers was what kind of mortgage to take on: a 30-year fixed rate mortgage or adjustable rate (ARM). A gentle upward climb of current mortgage rates -- as well as home prices -- was looking inevitable. The smart money was predicting that home prices had dropped as low as they could go. For people looking for loans, it seemed like the perfect window to buy low and lock in a rock-bottom fixed rate.

But then the U.S. jobs report hit in February, and it was ugly. It showed an anemic gain of only 36,000 new jobs created. Then oil prices shot up in response to uprisings against Hosni Mubarak of Egypt, Tunisia's Zine al-Abidine Ben Ali and, of course, Libyan dictator Muammar al-Qaddafi. All this chaos started to weigh down on interest rates and home prices.

What does all this mean for Joe homebuyer or refinancer? It means the housing market may have further to fall before it starts to rebound. And rates could drop even further.

But rates fluctuate all the time, and it's a mistake to make a financing decision based on which way rates are going to go, says Victor Shaio, a mortgage broker at MetLife Home Loans who handles real estate for NBA and NHL stars like former New York Rangers center Scott Gomez.

What borrowers must ask themselves is, How long do I think I'm going to be in this property? If
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they can answer that question, it's pretty simple. Rates are a lot lower on adjustable rate loans, but they reset to a new interest rate after the initial fixed period. If the borrower knows they are going to sell or refinance before the reset, an ARM is great.

But for someone who is buying the property as a longterm home, or is risk-averse, or won't sleep at night worrying about how much their payment could jump to, a 30-year fixed mortgage is a no-brainer. Yes, a fixed rate loan is going to cost more than an adjustable, but rates are still at historical lows.

"Don't be wowed by the sexy ARM interest rate," says Shaio, though he admits, "It can be a great program for the right borrower." For people wondering how long they will keep the house, or are unsure if they could handle a higher payment if they had to, it may be better to stick with a fixed.

A few other points to keep in mind:

--If you do go with an adjustable mortgage, be sure you understand if it comes with prepayment penalties and what index the reset is based on. ARM resets are typically pegged to the London Interbank Offered Rate (LIBOR) or U.S. Treasury yields.

--Consider loan types based on whether the purchase is an investment property or a home.

Remember, buying a house isn't a strictly financial decision. If you fall in love (with a home) you might be willing to pay more per month.

For more on mortgages and related topics see these AOL Real Estateguides:
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