An adjustable rate mortgage or ARM can be a terrific bargain for homebuyers, but since the interest rate will float up and down over time, a lot of buyers steer clear. Knowing what to consider in making a decision about the type of loan you want can be difficult, but Michael Holigan is About The House with some helpful advice.

Laura Shoberg: Bill... That one's yours.

Michael Holigan: Laura and Keith Shoberg didn't want to jump into a house with large monthly payments. They can't afford it right now. Their income is limited. For them, an adjustable rate mortgage, or ARM, made perfect sense.

LS: When we relocated out here I gave up my job in Phoenix, so consequently we didn't qualify for what we would have had I been working and we had made the decision that I wasn't going to go back to work for awhile. So, we had debts accrued on both incomes and it allowed us to have a lower payment and qualify for a bigger house.

MH: A number of people are scared of adjustable rate mortgages, but don't really understand how they work. Years ago they used to be volatile, but today the loans written are very stable. Here's how it works. Say you purchase $100,000.00 home and put 5% down. At the time you close the interest rate is 8%. That fixed rate would give you principle and interest payments of $697.00 a month.

On an ARM your rate would probably be 6% and the payments $570.00 a month. That's a savings of $130.00 every month that first year. ARMs are tied to indexes like treasury bills or prime interest rates. Your mortgage goes up or down depending on what the market is doing. But there is a limit on how far they can move. This is referred to as a 'cap' and it varies from loan to loan. The most common conventional loan cap is 2% annually and 6% over the life of the loan. So, on a 6% ARM the most you ever have to pay is 12% interest.

On an FHA loan you get a better deal. The caps can only move 1% a year, 5% over the life of the loan. So the maximum here for that 6% start rate would be 11%. And ARM makes some people nervous, but it's really a quality loan. No matter if it's short term or long term, in most cases you'll save money with an Adjustable Rate Mortgage.

I'm Michael Holigan, About the House.