Early in the loan, interest rates on an ARM are two to three points below conventional fixed-rate mortgages, so adjustable-rate mortgages are still an option for buyers stretching their budgets. Adjustable loans also are worth considering if you plan to be in your home a short time. In exchange for a low rate in the beginning, you have to accept a monthly payment that can fluctuate, unlike a fixed-rate loan where the monthly payment is locked in. That's because these loans are tied to indexes that go up and down. ARMs don't adjust every month, though. Most are adjusted every year or every three years and within proscribed limits, all of which should be spelled out clearly in your loan agreement.

• Significant interest expense savings for short term ownership (terms uess than 10 yrs)
• Lower monthly payment
• Able to qualify for greater loan amount because of lower monthly payment
• Flexibility

• Monthly mortgage payment has potential to increase should index of mortgage increase after expiration of fixed term
• Inability to ascertain future monthly payment amount with any degree of certainty (when initial fixed rate term expires)

• How long will the initial interest rate remain in effect?
• What will the interest rate be after the first adjustment?
• How high can the interest rate go if interest rates continue to rise?
• How long will it take for the rate on the ARM to reach the maximum allowed under the loan program?

An adjustable-rate mortgage that adjusts only once a year but has a higher initial rate may cost you less than one that adjusts twice a year but has a lower start rate. ARMs that adjust only once a year also enable you to prepare for monthly payment adjustments. Six-month adjustments can be more difficult to handle.

TIP: It may be a waste of money to pay points to buy down the initial rate on an ARM because the start rate is in effect for a short time. If you pay points, use the money to buy down the margin on the loan, which will save you money over the life of the loan.