One of the questions to consider when you’re buying a home is whether you want a fixed-rate or adjustable-rate mortgage (ARM).
With a fixed-rate mortgage, your payment remains the same for the duration of the loan.
An ARM is fixed for an initial period of time — three, five or seven years. Then it fluctuates based on market interest rates. The "caps" on your loan will indicate how much the mortgage rate can change after the initial fixed period.The risk with an ARM is that the rate can go up after that fixed period. The advantage is that the rate during the fixed period is usually lower than it would be for a conventional loan.
So your best financing option depends largely on how long you intend to occupy your home. If you intend to stay in the same place for the life of the loan, you may be better off with a fixed-rate mortgage because you’ll be protected against rate increases. But if you think you’ll move after a few years, that’s like paying for an insurance policy that you’ll never need. Similarly, you’ll want to consider how long you intend to be in that home before deciding on a three-, five- or seven-year ARM. And if an ARM will produce additional cash flow for you, you’ll need to decide what to do with that money — spend it or invest it, perhaps in another house. A qualified mortgage professional should be able to help you sort through the options available, and decide with one is best for you.