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Why you should love the record-low mortgage rates

Anne Schaeffer fills out a form to receive

Anne Schaeffer fills out a form to receive more information after touring a new home for sale in the Boulevard Heights development in St. Louis. Mortgage rates fell to the lowest level in decades for the ninth time in 10 weeks as concerns grow that the economy is weakening. (March. 3, 2012) Photo Credit: AP Photo

here's one big reason to love today's mortgage rates.

That's right, one. As in one percentage point.

Average 15- and 30-year fixed-rate home loans are about a percentage point cheaper today than they were this time last year.

Today's average fixed-rate mortgages cost a bit more than 4%.

Last February, 30-year mortgage rates surged above 5% before falling throughout the rest of the year and ending 2011 at record lows.

Our most recent mortgage rates survey will show you the average price for home loans this week.

Then see how much cheaper financing is in your area by searching our extensive database of the best mortgage rates from hundreds of lenders.

Depending on your location and credit score, you may be able to beat the average.

In most big cities, lenders are offering financing for as little as 3.625% with no points and application fees of less than $2,000.

The principal and interest payments on such a home loan would be $456 a month for every $100,000 borrowed.

Use our mortgage calculator to see what your payments would be for any fixed-rate loan.

Take a chance on an ARM?

If these historically cheap mortgage rates don't impress you, there is a way to pay even less: Take out an adjustable-rate mortgage.

The average rate on a 5/1 ARM -- those are home loans where the interest rate is fixed for the first five years and then changes once a year after that -- is about 3%. But you can find adjustable-rate mortgages that charge 2.5% or less.

Today's average ARMs will save you more than $60 for every $100,000 borrowed compared with the average fixed-rate home loan. Our adjustable-rate mortgage calculator shows you how much you can save.

Of course, that discount is only guaranteed for five years. Your initial savings could quickly vanish if your interest rate increases -- which it probably will, given how low mortgage rates are now.

Indeed, an ARM isn't right for everyone.

"In today's historically low interest rate environment, if the homeowner expects to remain in their home for more than three to five years, an ARM really makes little sense," says Steven A. Wolf, a certified public accountant and executive director of Capstone Advisory Group in Washington, D.C. "An ARM makes sense in situations where individuals expect to be in the location on a short-term or temporary basis."

If you plan to move in the next few years, the lower interest rate on a 5- or 7-year ARM could save you thousands of dollars in interest payments. But make sure to get an ARM with a term that's fixed for at least as long as you plan to stay in the home.

"The obvious risk is that as the rate adjusts, it can go up to a point where it may become unaffordable if the home buyer decides not to move or cannot move," says Matt Perillie, senior loan office at Campbell Mortgage in West Haven, Conn.

Greg Meyer, community relations manager with Meriwest Credit Union in San Jose, Calif., says when adjustable loans reset, they can increase by 2% in a year.

"That would cause the payment to increase pretty dramatically. I think this is a good argument for a fixed-rate loan," he says.

If your ARM increased from 2.88% to 4.88% -- and then to 6.88% -- your monthly principal and interest payment would jump from $415 to $530 to $657 for every $100,000 borrowed.

Could you still comfortably afford the payments if this happened?

If not, an ARM is a risk you shouldn’t take, especially when you can score mortgage rates for 4% or less that last for the life of your mortgage.

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