If you're buying for the first time, frequently moving, looking for a way to qualify for a more expensive house than you'd normally expect for your income level, or just looking for more creative ways to finance, you should look into adjustable-rate mortgages (ARMs). An ARM is a mortgage in which the interest rate and monthly payment periodically change to reflect current market conditions.

An ARM generally has a lower initial interest rate than a fixed-rate mortgage and usually allows you to qualify for a larger loan. This is because you are sharing some of the risk of rising interest rates with the lender. In other words, if rates go up or down, your payment goes up or down as well.

Depending on the plan, your monthly payment will change periodically (for example, once every six months, every year, or every three years). To give you some protection from high-interest inflation, you may receive a "cap" or ceiling to limit the amount your interest rate can rise, both periodically and over the lifetime of the loan. The amount of the rate change depends on the "index" used.)

ARM Advantages:
• You'll start out with a lower interest rate, and therefore smaller mortgage payments, in the early years when you're still getting on your financial feet.

• That lower rate may make it possible for you to qualify for a larger loan amount than you could get on a fixed-rate mortgage.

ARM Disadvantages:
• You gamble that in a few years you'll be able to handle larger payments if interest rates rise.

• You don't know how high the rate may climb up to the specified capped limit. Of course, it could decrease instead. But it's smart to look at the "worst-case scenario" (most lenders are required by law to disclose this) in deciding if you can handle an ARM.