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Length of Ownership

If you don't plan or expect to stay in your home for a long time, you should consider an ARM. Saving money on interest charges for most adjustables is usually guaranteed in the first two to three years, because an ARM starts at a lower interest rate than a fixed-rate loan does. Should interest rates rise, however, you can end up paying more interest in subsequent years with the adjustable-rate loan.

A mortgage lender takes more risk when lending money at a fixed rate of interest for many (15 to 30) years. Lenders charge you a premium, in the form of a higher interest rate than what the ARM starts at, for the interest-rate risk that they assume with a fixed-rate loan.

If you expect to hold onto your home and mortgage for a long time -- more than five to seven years -- a fixed-rate loan may make more sense, especially when you're not in a position to withstand the fluctuating monthly payments that come with an ARM. If you don't plan on keeping your home and mortgage for more than five years, an ARM likely will save you money.

When you're in the intermediate area (expecting to stay seven to ten years, for example), consider the hybrid loans. If you're still stuck on the fence, go with the fixed-rate loan. A fixed-rate loan is financially safer and easier to shop for than an ARM.