Consumer Handbook on Adjustable Rate Mortgages

This booklet explains how ARMs work and some of the risks and adv advantages to borrowers that ARMs introduce. It discusses features that can help reduce the risks and gives some pointers about advertising and other ways you can get information from lenders. Important ARM terms are defined in a glossary on page 19. And a checklist at the end of the booklet should help you ask lenders the right questions and figure out whether an ARM is right for you. Asking lenders to fill out the checklist is a good way to get the information you need to compare mortgages.

WHAT IS AN ARM?

With a fixed-rate mortgage, the interest rate stays the same 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 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 t 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: der: * Is my income likely to rise enough to cover higher mortgage payments if interest rates go up? p? * Will I be taking on other sizable debts, such as a loan for a car or school tuition, in the near future? e? * 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 i if you plan to own the house for a long time.)