Home Finance Guide: Rising Interest Rates of an ARM

Many first time new home buyers decide on an adjustable-rate mortgage, which allows them to stretch their money for a bigger and/or more expensive house.

Before deciding on an adjustable-rate mortgage (ARM) for your new home, thoroughly understand how rising interest rates will affect your personal finances and budget.

If you answer anything other than - "no problem," to the following questions, seriously reconsider an adjustable-rate mortgage.

1. If your mortgage payment went up due to a rise in interest rates, would you be able to handle your other financial obligations and goals (savings, retirement, college fund, etc.)?
2. Would you be able to afford the highest payment allowed on the adjustable-rate mortgage? Your lender can tell you what the highest possible monthly payment would be (lifetime interest cap allowed on your ARM).
3. Do you have an emergency reserve fund - equal to at least 6 months of living expenses - just in case you need to make higher monthly mortgage payments, over an extended period of time?
4. Can you handle the stress of changing interest rates (possible monthly fluctuations)?
5. Is the amount that you're borrowing testing the limits of your budget? Is your income/job stable enough to handle the size of your loan - if interest rates rise?

It's best to consider an adjustable-rate mortgage only if you'll be financially and emotionally unaffected - if paying the maximum possible payments over an extended period.

ARMS definitely work best, for those folks who take out smaller loans than qualified for, and are able to save at lest 10% on their monthly income.

Plain and simple, you're better off buying a new home with a fixed-rate mortgage (higher interest rate), if you run the risk of getting in over your head with an ARM.