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With a fixed-rate mortgage, the interest rate stays the same during the life of the loan. But with an ARM, the interest rate changes periodically, usually in relation to an index, and payments may go up or down accordingly.

Lenders generally charge lower initial interest rates for ARMs than for fixed-rate mortgages. This makes the ARM easier on your pocketbook at first than a fixed-rate mortgage for the same amount. It also means that you might qualify for a larger loan because lenders sometimes make this decision on the basis of your current income and the first year's payments. Moreover, your ARM could be less expensive over a long period than a fixed-rate mortgage--for example, if interest rates remain steady or move lower.

Against these advantages, you have to weigh the risk that an increase in interest rates would lead to higher monthly payments in the future. It's a trade-off--you get a lower rate with an ARM in exchange for assuming more risk.

Here are some questions you need to consider:

• Is my income likely to rise enough to cover higher mortgage payments if interest rates go up?
• Will I be taking on other sizable debts, such as a loan for a car or school tuition, in the near future?
• How long do I plan to own this home? (If you plan to sell soon, rising interest rates may not pose the problem they do if you plan to own the house for a long time.)
• Can my payments increase even if interest rates generally do not increase?
  

  The above text was extractly directly from the Consumer Handbook On Adjustable Rate Mortgages, as published by the Federal Reserve Board and Office of Thrift Supervision. Although the above text is public domain, this electronic booklet is copyrighted © 1996 by Mortgage Market Information Services, Inc. Readers of this electronic booklet are allowed to print the booklet for non-profit distribution

  Pg 1 -- Introduction and credits
  Pg 2 -- PEOPLE ARE ASKING
  Pg 3 -- PEOPLE ARE ASKING (continued)
  Pg 4 -- WHAT IS AN ARM?
  Pg 5 -- HOW ARMS WORK:THE BASIC FEATURES
  Pg 6 -- FEATURES (continued)
  Pg 7 -- CONSUMER CAUTIONS (Discounts)
  Pg 8 -- CONSUMER CAUTIONS (Payment shock)
  Pg 9 -- HOW CAN I REDUCE MY RISK?
  Pg 10 -- REDUCE MY RISK (continued)
  Pg 11 -- REDUCE MY RISK (continued)
  Pg 12 -- REDUCE MY RISK (continued)
  Pg 13 -- REDUCE MY RISK (continued)
  Pg 14 -- WHERE TO GET INFORMATION
  Pg 15 -- INFORMATION (continued)
  Pg 16 -- GLOSSARY
  Pg 17 -- GLOSSARY (continued)
  Pg 18 -- MORTGAGE CHECKLIST
  
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