Choosing a mortgage has been a simple matter during recent years of record low rates: lock in the best deal you can find with a 30-year, fixed-rate loan. After all, with these great fixed deals offered everywhere, why risk a future rate increase with an adjustable-rate loan?

In fact, fixed-rate mortgages account for the vast majority of new mortgages issued — more than 93 percent in the most recent weekly survey by the Mortgage Bankers Association.

But it turns out not everyone sees fixed-rate loans as the belle of the ball. Many mortgage experts and financial advisors say an ARM can be the best choice for certain investors due to lower payments and, often, lower closing costs. The average rate on new fixed loans was 4.35 percent in early February, compared to 3.39 percent for a 5/1 ARM that holds the starting rate for five years before beginning annual adjustments.

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“Today’s environment of low interest rates makes [fixed-rate mortgages] a more attractive option for borrowers,” says Edward Seiler, chief housing economist at Summit Consulting in Washington.

“There is a low likelihood that rates will continue to go down, and most economists agree that over the next decade, rates will go up,” he says. “However, ARMs are still suitable for sophisticated borrowers who need a lower payment today, and will be able to pay off the loan through refinancing or moving before rate increases hurt them.”

“Most savvy borrowers do consider ARMs as their chosen program,” says Mat Ishbia, president and CEO of United Wholesale Mortgage, a lender in Troy, Michigan. “They are fully aware of when the loan terms are subject to change and take advantage of the low rates and potential to pay off their mortgage quicker (through extra principal payments) than a traditional fixed loan.”

The choice typically comes down to simple arithmetic. If the lower ARM rate gives you a smaller monthly payment to start but larger payment later, at what point will the ARM cost more than the fixed-rate mortgages? With today’s average rate, a borrower would definitely win with an ARM for the five years it would charge less than a fixed loan. But if the ARM rate then jumped by 2 percentage points, to 5.39 percent, the ARM payment would be bigger than the fixed payment, and the initial savings would be wiped out in the following years.

Of course, the ARM rate could stay lower for longer. But most experts now expect rates to drift up, not down, and it’s clear most borrowers would prefer not to take a chance and to lock in the still-low fixed rate while they can.

“People who might want to consider adjustable rate mortgages include those buying a starter home, those who tend to get relocated with their job,” says Ray Rodriguez, regional mortgage sales manager at TD Bank in New York. “The main factor is being able to answer, ‘How long do I plan on staying in this home?'”

Short-term owners include young couples likely to need more space later, people likely to face career moves and near-retirees looking to save by refinancing to an ARM now but likely to downsize or move in a few years.

People confident of their investing skills might come out ahead if they can invest the monthly savings from an ARM at a return higher than the rate they’d have paid to borrow with a fixed-rate loan.

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ARMs also benefit those who make extra principal payments to reduce or eliminate their debt ahead of schedule. Because the annual adjustments consider the remaining debt as well as the new interest rate, prepayments reduce the required payment going forward, making the mortgage easier to handle. Prepayments on a fixed-rate loan, in contrast, do not change the required payment but allow the loan to be paid off early.

Standard ARMs come in various flavors, depending on how long the initial rate remains fixed, typically one, three, five, or 10 years. The longer it is fixed, the higher the loan rate. Loans with shorter initial periods are riskier but offer more savings. After the teaser period, rates usually adjust every 12 months.

“We see 5/1 and 7/1 ARMs being chosen most often,” Ishbia says. “They are low risk and oftentimes consumers only stay in a loan for on average five to nine years.”

The most fearless borrowers can consider an interest-only loan that charges interest on the outstanding balance but does not require any payments toward principal for a number of years. These IO ARMs have the lowest payments but borrowers who make no contributions to principal can see their credit scores slip. Today’s IO loans do not have the toxic features these loans were once known for, such prepayment penalties and negative amortization that raised the loan balance over time, Ishbia says.

“Interest-only ARMs serve a purpose for a very disciplined homeowner,” Rodriquez says. “They understand that they need to apply funds over and above their monthly payment toward principal. Usually those borrowers rely heavily on bonus income, so this frees up their cash flow during the course of the year.”

Experts say borrowers need to consider several other factors beyond the loan rate before choosing an ARM. One is how the adjustments are done. Typically, that’s by adding a margin, or fixed number of percentage points, to an index outside the lender’s control, such as the one-year London Inter-Bank Offered Rate.

Another factor is the cap on rate changes once the adjustments begin, often 2 percentage points up or down per year, and 6 points up over the loan’s lifetime. Obviously, higher caps make a loan riskier and borrowers should be sure they will be able to handle the largest increases possible.

ARMs are also attractive to borrowers who cannot qualify for the larger payments required by a fixed-rate loan.

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“Often, when fixed-rate jumps up over half a point, more people flock to adjustable,” Rodriguez says. “It really depends on one’s interest rate risk tolerance. There is a sense of stability with a fixed-rate mortgage.”

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Which Are Better: Fixed-Rate Mortgages or ARMs? originally appeared on usnews.com