Should I take an ARM or a fixed-rate mortgage?

Q: I am torn between choosing between an arm and a fixed rate. I have a jumbo loan and if I pay a certain amount for 7 years I could bring my balance down to less than $417,000 and then refi at the conventional loan rate which is lower than the jumbo rate. I am just afraid that in 7 years the rate would be a lot higher than it is now and I'll be in the same position.

A: Today's ultra-cheap ARMs can be attractive, but fixed interest rates for jumbos are now at record low levels. Since we are at rock bottom right now, it's a good bet that interest rates will be higher in the future. If they are, refinancing might not be a possibility, and you could be stuck with a sharp rise in monthly payment. Even if you can refinance, interest rates will almost certainly be above -- and perhaps well above -- the rate you will have been be paying on your loan for the last seven years. Seven years is a long time, and if you really plan on being in your home for longer than that, a fixed-rate loan is probably the way to go, even if the savings from an ARM are compelling.