Adjustable Mortgages

What do I need to consider when evaluating an adjustable-rate mortgage (ARMs)?

When considering an ARM, you absolutely, positively must understand what rising interest rates (and, therefore, a rising monthly mortgage payment) would do to your personal finances. Only consider taking an ARM if you can answer all of the following questions in the affirmative:

- Is your monthly budget such that you can afford higher mortgage payments and still accomplish other financial goals that are important to you, such as saving for retirement?

- Do you have an emergency reserve (equal to at least six months of living expenses) that you can tap into to make the potentially higher monthly mortgage payments?

- Can you afford the highest payment allowed on the adjustable-rate mortgage? The mortgage lender can tell you the highest possible monthly payment, which is the payment that you would owe if the interest rate on your ARM went to the lifetime interest-rate cap allowed on the loan.

- If you are stretching to borrow near the maximum the lender allows or an amount that will test the limits of your budget, are your job and income stable?

- If you expect to be having children in the future, how much will your household expenses rise and will your income fall with the arrival of those little bundles of joy?

- Can you handle the psychological stress of changing interest rates and mortgage payments?

If you are fiscally positioned to take on the financial risks inherent to an adjustable-rate mortgage, by all means consider taking one -- we're not trying to talk you into a fixed-rate loan. The odds are with you to save money, in the form of lower interest charges and payments, with an ARM.

Also recognize that, almost all adjustable-rate loans limit, or cap, the rise in the interest rate allowed on your loan. We certainly wouldn't allow you to take an ARM without caps. Typical caps are 2 percent per year and 6 percent over the life of the loan.