A couple of decades ago homebuyers had almost no choice in mortgage financing. It was pretty much a put-twenty-percent-down-get-a-30-year- fixed-rate-loan world. According to the US Department of Housing and Urban Development (HUD), the addition of adjustable rate mortgages has allowed more people to become homeowners, helping about 45,000 families in 2003 alone.

It's a different world today. People move and change jobs more often than in the past; now, Americans keep their homes an average of just 5 years. Why then would you get a 30-year fixed-rate mortgage and pay a higher rate?

You won't stay put.

1. Your financial setback was temporary. Many families move to pursue job opportunities, get into a better neighborhood or school district, be closer to relatives, or find a nicer climate. A hybrid ARM, which starts out at a lower introductory rate and doesn't change for 3, 5, or 7 years may be your lowest cost option.
2. You expect an increase in income in the future. If you find your perfect home or an exceptional investment, but can't swing the higher payment of a fixed-rate loan, an option ARM with a very low payment could help you get in now--the idea being that when your payment increases you will be able to afford it.
3. You're a savvy investor and understand the risk. Some homeowners want the lowest rate or payment they can get to free up cash for other investments. For example, if you have a 3 year hybrid ARM at 4%, and you can invest the money elsewhere at 8% it may make sense to do so.

If you're facing an ARM rate change or reset this year, take a close look at your situation. If you're uncomfortable with a rate that can change, then refinance your ARM into a fixed-rate loan and forget about it. Refinancing into another ARM is another option for those who might be moving in the next few years. A good mortgage lenders should be able to help you evaluate your situation and help you select the loan that works best for you.

Sources:
HUD

FNMA (Fannie Mae)

Asher Institute

About the Author
Gina Pogol works as a writer and editor for an online media company. She has a BS in financial management, was formerly a business credit systems consultant with Experian and a mortgage loan consultant.