Q. I just read your article on option ARMs. Why does it say that the homeowner will not gain equity by paying the minimum payment or the interest only payment? Isn't it true that home values in California will increase at least 5% a year? Won't that offset the fact that you aren't paying down your debt, or even adding to it?

A.If you are not paying back some of the principal, you are not building equity -- you are hoping to gain equity through appreciation. That was a good bet over the last few years, but study after study shows that appreciation is slowing -- even in California.

The Office of Federal Housing Oversight Enterprises says California home prices were 1.21% lower during April, May and June 2007 than they had been during the previous three months. And they were down 1.38% from one year ago. The National Association of Realtors latest report says home prices declined in five of seven California cities between the third and fourth quarter of 2006.

A widely quoted study by Moody's shows many areas in California at "significant risk" for declining home values over the next two to three years. The crisis driving many subprime lenders out of business will also make it harder for potential buyers with bad credit to get financing. So we question the wisdom of taking out a loan that counts on appreciation to offset the fact that you aren't paying down, and perhaps even adding to, the principal.

What's worse is that the interest rates charged by option ARMs usually begin rising within months of closing. Buyers who could barely afford their loans at the low introductory rate soon find themselves unable to keep up, even if they only make the minimum monthly payment. They can't afford to sell or refinance either because of hefty prepayment penalties during the first several years of the loan -- another bad feature of most option ARMs.

Here's a good rule of thumb for most homebuyers: If the only way you can afford the payments on a home is through an option ARM or an interest-only loan, you can't afford to buy the home.