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A 2.9% mortgage rate sound great, but is it too good to be true?

Anyone looking for a home loan knows they want to get the best interest rate possible, but getting a great deal has a lot more to it than comparing rates at face value. The current rate for a 5-year adjustable-rate mortgage is roughly 2.9% but an ARM may not be right for you. To ensure you’re applying for your most affordable option, there are several things you need to know in advance about mortgage rates.

Short- & Long-Term Low Rates

When you’re looking for an affordable home loan, you need to know the difference between a fixed-rate mortgage and an adjustable-rate mortgage (ARM). If the acronym ARM leaves you a bitter taste in your mouth, you’re not alone: Subprime ARMs played a significant role in the recent mortgage crisis.

ARMs often start with an interest rate lower than those of fixed-rate loans available at the same time. That low rate is set for a period of 1, 3, 5, 7 or 10 years, after which the rate is adjusted annually, based on an index specified in the mortgage agreement. Once that fixed-rate period ends, the loan’s interest rate may rise significantly and leave you with mortgage payments much more expensive than you expected.

The type of loan that suits you best depends on the plans for your future, and you can read more about the differences between fixed- and adjustable-rate mortgages here. When you’re thinking of buying a home, do your research well in advance of applying for a mortgage, and shop around for the best rates.

How to Get That Low Rate

Your ability to get an interest rate you’re comfortable with relies heavily on your credit standing, which is why you should monitor your credit months (or better yet, years) before you plan on applying for a mortgage. The lowest rates are typically reserved for applicants with the best credit histories, meaning they’re clear of late payments, maxed-out credit cards, collection accounts and unpaid debt.

Even if you determine an ARM suits your needs best, you can only take advantage of a low rate if the lender deems you creditworthy of receiving it. All consumers should regularly review their credit reports and scores, but it’s especially important for people who plan to buy a house in the near future. Checking your scores — which you can do for free using tools like those on Credit.com — will alert you to potential weaknesses in your credit portfolio and you can work to improve them before you start applying for loans. You also want to review your free annual credit reports, because you don’t want to find out about a potentially damaging trade line or error when you’re seeking loan approval.

More on Mortgages and Homebuying:

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