Suppose

the current index rate is 6 percent and the

margin is 2 percent. The interest rate used for

calculating an ARM rate would be 8 percent, which

is the sum of the two. The index rate is usually

some common measure of interest rates available

regularly in the newspaper and on the Internet.

There

are many different types of ARMS. Some maintain a

fixed rate for up to ten years before making any

adjustments. Others may adjust the rate only one

year or even one month after closing.

Most

ARMs have caps on how much the interest rate can

increase in any adjustment period and/or over the

life of the loan. The caps may be different at

different points in the loan.

For

instance, an ARM that maintains the initial rate

for five years may then adjust every year

thereafter. The allowable increase after the

first five years may be larger than the allowable

increase in any of the later years.

ARMs

with a long initial adjustment period are

especially attractive to buyers who do not expect

to stay in a home long. If a buyer has an ARM

with an initial adjustment period of five years

and stays in the house for only four years, there

will not be any adjustments on the loan. The

buyer enjoys the advantage of the lower initial

rate without ever having to experience possible

rate increases.

As

a rule, the greater the amount of interest rate

risk borne by the home buyer seeking a loan, the

lower the initial interest rate will be. For

instance, an ARM which adjusts after one year and

then every year thereafter is likely to carry a

lower initial rate than an ARM which does not

adjust until the end of the fifth year. The home

buyer with the loan that does not adjust for five

years is receiving greater interest rate security

and pays for such security in the form of a

higher initial rate.

ARMs

can save a home buyer money should interest rates

decline. With a fixed-rate mortgage, the only way

to benefit from a drop in interest rates is to

refinance the loan, which is expensive. With an

ARM, a drop in mortgage rates might lower monthly

payments without the need to refinance.

home buyer can get an idea about the possible

volatility of an ARM by looking at a table

showing the movements of the index over the

previous ten years. Be advised that interest

rates can be very volatile and unpredictable, and

past experience does not necessarily indicate

what could happen in the future.

Home

buyers should also look at a worst-possible-case

scenario of how much payments could increase

under the caps set on the loan. The worst case

may be very unlikely, but it will help in

understanding the potential risk of the loan.

Many

ARMs include initial discounts. The discount may

allow a buyer to qualify for a loan more easily,

but it also may result in a sizeable increase in

the monthly payments at the first one or second

adjustment periods. With a discounted ARM, find

out how the payments might change even if

interest rates stay constant.

For

many people, buying a home represents the largest

purchase they will make in their lifetime. If you

are shopping for a new home, an adjustable rate

mortgage could be an important financing option

worth considering. Depending on your

circumstances, an ARM could save you money and

make your home more affordable.

Lenders

are offering many different types of ARMs. As a

result, it is easy to get confused. Adjustable

rate mortgages are not for everyone, so do your

homework and ask questions. What may sound

attractive in the short term could cost you a lot

of money in the future.

To

learn additional information about ARMs and other

types of mortgages, you may call Fannie Mae's

Consumer Resource Center toll-free at

1-800-732-6643 (1-800-7-FANNIE). Information is

also available on the Internet from a few

different sources.

At

www.homebuilder.com, you can find information by

clicking on "Mortgage Center." The

Mortgage Bankers Association of America has a Web

site at www.mbaa.org and consumer information

about home mortgages can be found in the

"Buying a Home" section. And Fannie Mae

sponsors a Web site that can be accessed at

www.homepath.com. The information about home

mortgages can be found in the section called

"HomeStarterPath."

Jeff

Betsill, owner of Jeff Betsill Homes, is

president of the Home Builders Association of

Midwest Georgia, which serves a membership of

approximately 410 builders and associate members

in Fayette, Coweta, Spalding, Heard and

Meriwether counties.