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Mortgage  Question?
Is a 3 or 5 Year ARM the better mortgage option?

Based on current mortgage rates, what is the best option: a five year ARM with a 2.23% rate or a three year ARM with a 2.05% rate?

Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience
, Trusted Mortgage Expert with 45+ Years of Experience

The answer to your question is based less on current mortgage rates and more on how long you plan on owning the property.  With an adjustable rate mortgage (ARM), your interest rate is fixed for a set period of years -- usually three, five, seven or ten years -- and then the rate is subject to change and potentially increase over the duration of the mortgage, which is usually 30 years.  We provide a comprehensive overview of adjustable rate mortgages (ARMs) on FREEandCLEAR as well as a detailed overview of the downsides and risks of an ARM.  Additionally, we recommend that you use our ADJUSTABLE RATE MORTGAGE CALCULATOR to determine the initial monthly payment and worst case scenario for an ARM.

In an ideal scenario, you would only live in the home during the initial fixed rate, also know as the "teaser" rate, period of the loan and you would sell the property before the loan reaches the adjustable rate period, when the interest rate and your monthly mortgage payment can possibly increase significantly.  That way you benefit from the lower interest rate and monthly mortgage payment during the initial period of the mortgage but you avoid the risks associated with an ARM.  So in your case, if you think you are going to own the property for less than three years, then a 3/1 ARM makes sense.  If you anticipate owning the property for less than five years then a 5/1 ARM makes more sense.  If you are going to own the property for a longer period of time a 7/1 AMR or 10/1 ARM make more sense.  And if you are unclear about how long you are going to own the property then you should consider a 15 year or 30 year fixed rate mortgage, which provide the certainly that your interest rate and monthly mortgage payment will not increase over the life of your mortgage.  When it comes to selecting a mortgage, our general advice is it is better for borrowers to be safe than sorry especially because mortgage rates can be so unpredictable.

In terms of mortgage rates, the longer the fixed rate period for an ARM, the higher the initial interest rate.  For example, the initial interest rate for a 5 year ARM is higher than the initial interest rate for 3 year ARM.  You can use the INTEREST RATES function on FREEandCLEAR to compare real-time interest rates for ARMs with different fixed rate periods.  Use the "Loan Type and Term" option in the "Refine Your Search" menu to review interest rates and fees for 1 year, 3 year, 5 year,  7 year and 10 year ARMs.  This feature empowers you to find the mortgage that is right for you and is free to use, like everything on FREEandCLEAR.

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About the author

Harry Jensen, Mortgage Expert

Harry is the co-founder of FREEandCLEAR. He is a mortgage expert with over 45 years of industry experience. Over his career, Harry has closed thousands of loans for satisfied borrowers and now offers his advice and insights on FREEandCLEAR. More about Harry

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