We have all received credit card offers carrying an initial low "teaser" rate of interest that eventually re-sets to a much higher rate. Adjustable-rate mortgages work the same way. For the first two to five years they have a low interest rate, then they "re-set", usually upward, and your comfortable monthly mortgage payment suddenly increases, sometimes even to a level unaffordable to you as a homeowner.

People are walking away from their properties, some are even "upside-down" in their mortgage- they owe more than the property is now worth, since in most areas of the country property values have decreased. If you took out a 95% loan 5 years ago, that property may very well now be worth less than the outstanding loan balance! Worse, lenders have tightened lending guidelines considerably and now will not make loan for more, usually, than 90 to 95% LTV ("Loan to Value". And that is a maximum for individuals with excellent credit. If your credit is less than perfect, you will probably be limited to 80 to 85% LTV when you go to refinance.

OK, that is the bad news. There are times, however, when an ARM makes sense. IF you are not planning to keep your home very long, and will be selling in a few years, an ARM at a low interest rate may be a good choice for you. Military families, for instance, that are transferred every 2 to 4 years.

Also be aware of pre-payment penalties. Read the fine print! Some ARM's carry penalties, typically 6 months' interest, if you refinance and pay the loan off before, usually, 2 to 3 years. Some pre-payment penalties stay on the loan for a year AFTER the ARM will re-set to a higher interest rate, so you are forced to swallow hard and make 12 more expensive monthly payments before you can refinance out of the ARM!

If you have an ARM now, find out if there is a pre-payment penalty and if so, when it expires. Find out when your ARM will re-set. Then contact a mortgage broker and look into re-financing into a fixed-rate mortgage. Don't expect to always get a fixed-rate at or below the ARM's initial interest rate. But remember, the new rate will never change. Ask the broker about refinancing into an FHA loan. These loans are easy to qualify for and carry lower interest rates because they are backed by HUD, part of the federal government. They are also usually assumable, so when you are ready to sell, the new buyer can take over the loan and benefit from its low interest rate;an important selling point in a tough market!