Adjustable rate mortgages give homeowners options when it comes to paying off their house and reducing the amount of their mortgage payments. But within this outward appearance of benefits lies a high element of risk. Knowing whether or not this mortgage plan is right for you requires digging into it and seeing just what all is involved.



Unlike most fixed-rate mortgages which have but one payment option each month, ARM's allow the homeowner to select their method of payment each and every month. This boils down to four key choices, minimum, interest, 30 year and 15 year.

Minimum payments are attractive options, and are the main reason this mortgage plan has been dubbed the "Nightmare Mortgage". Even on high valued homes, these payments are low enough that homeowners who would otherwise be unable to afford the mortgage payments on such a house can do so with ease. Of course this is all just an illusion, which the homeowner surely knows, but which many will concede to anyway. By making only minimum payments, not only does the homeowner not make a dent in the amount of money they owe on the home, but they actually slide further in debt.

As with all lines of credit, it can be a slippery slope climbing out of the hole when letting a debt like this continue to increase exponentially. After some time, the loan will be recalculated and the minimum will increase, sometimes as much as double its original amount, while still continuing to slide the homeowner deeper and deeper into debt. By that point it may be too late for the home owner to ever recover.

Interest only payments are slightly higher than minimum payments, but still less than a typical mortgage. This payment plan does not reduce the amount of principal value owing, but at least covers the interest so that the home owner is not sliding deeper into the hole.

30 and 15-year payment plans are typical mortgage payments that reduce the amount of principal owing, getting you that much closer to owning the house. These payments are of course higher than interest or minimum payments and you can always to pay things off faster.

These loan types can be useful and make a good deal of sense for certain individuals. For everyone else with designs on one day owning their home, a standard mortgage should be chosen. The ability to make minimum payments is an option that may be too tempting for some, and will just lead to a lot of extra money owing down the line. So who can make use of this mortgage type?

First and foremost are people who plan or expect to relocate every few years. This can be used to get you into a suitable house without making large payments that will be lost when the inevitable move occurs. Another group that can benefit from these are people who either have income that comes in large lump sums, such as company executives, or people who expect a windfall of another sort in the future, be it from inheritance, legal settlement, etc.

This will allow you to make just the minimum or interest payments to get by and maintain enough cash flow until the lump sum arrives, thereby allowing you to pay down the house quickly.

This mortgage can be a useful tool for just about anyone, but should be approached with caution. If you feel you can benefit from the freedom of choice without causing yourself undue distress down the line, then this is certainly an option worth looking into.