Financial Answer Center

Once you decide whether you'll pay points or not, your financing decision will probably come down to two basic options: Should you stick with the traditional fixed-rate loan or take a chance on an adjustable-rate mortgage (ARM)?

Your answer hinges on your individual situation, specifically:

• Your current and future family income
• Your mobility
• Where you think interest rates are headed in the future

When choosing between an ARM and a fixed-rate mortgage, it is important to understand how each works.

The fixed-rate option is fairly straightforward. It has an interest rate and monthly payments that remain constant over the life of the loan. With an ARM, the interest rate varies with the index to which it is tied. ARMs usually have low fixed interest rates, known as "teasers," for an initial period. This period may be six months to as many as seven years. Thereafter, the rate is adjusted based on a predetermined index. Many ARMs cap the interest rate increase at six points over the life of the loan with annual increases of no more than two points. This helps you avoid "payment shock" if interest rates rise while you hold the loan.