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1)Short Term Purchase
You don't plan on staying in the home, or keeping the mortgage, past the fixed portion of the program.
Example: If you plan on being in the home five years choose a program that is fixed for 5 years. Three-year terms and seven-year terms would work accordingly.
If you know you wouldn't be in the property at the adjustment then why pay the higher rate of a fixed rate program. The purpose of a fixed rate is to protect you against rising rates for 30 years. Since you wouldn't be in the home during years 6-30 then there is no need to pay to have your rate fixed that long.
2)Lower Rate & Costs
It may be that you can't qualify for a fixed rate loan because the monthly payment is just to high. This leaves you with the need to decrease the payment. This can be done 3 ways:
A) Put more money down
B) Pay additional points to lower rate
C) Choose a program with a lower rate
If you don't have the funds to make a larger downpayment down or to buy the interest rate down via paying more points, you can get both a lower rate and lower points by going with a ARM product.
If you plan on staying in the house a long time you may end up paying a higher rate after it starts adjusting but the important thing was that it allowed you to get the house. Hopefully the homes appreciation will more than offset any increased cost of the adjustable rate.
3)Interest Rate Gamble
If the current interest rate environment is a high, a person can opt for an ARM program even though they are planning on staying in the home longer than 7 years. One can gamble on rates dropping and opt for a discounted ARM program, realizing the savings over the first few years and then refinancing to a fix rate mortgage down the road at a lower rate. This allows a borrower to obtain the short term savings of the ARM program and the long term savings of the fixed rate program. Of course as with any gamble you must be prepared to loose so make sure you investigate the rate environment carefully.
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