ARMs weaker but still pack a punch

Once the darling of the mortgage industry, adjustable-rate mortgages are getting tougher to obtain. Savvy -- and qualified -- buyers, however, still may find them worth the hunt.

Adjustable-rate mortgages, known as ARMs, have been shouldering much of the blame for the housing crisis. In many cases it's for good reason: The loans, which adjust periodically after a set introductory rate, carry greater risks than fixed-rate mortgages.

For an uneducated buyer, an ARM may be a recipe for financial trouble.

"There's no question that an ARM can be a great tool for some, but a time bomb for others," says Bob Moulton, president of the Americana Mortgage Group. In the past year, many who bought at the top edge of their budget got unwelcome payment increases of hundreds or thousands of dollars when rates adjusted at the end of the introductory period. Often, those soaring costs forced a homeowner into foreclosure.

The problem, says Scott Yonehiro, senior board member of First Security Lending, is that the ARM, once a niche product for a relatively small number of real estate investors and savvy homebuyers, became a product used by the masses. For many people, it's simply the wrong tool for buying a home.

"Mortgages are similar to golf clubs in a golf bag," he says. "You wouldn't use a driver for an eight-foot putt, just as you wouldn't use a 30-year fixed mortgage for a house you intend to live in for three years," he says. "There's no such thing as a bad mortgage -- only bad loan officers who improperly suggest the wrong loan for a client."

Tightening credit standards means that it's tougher to get any loan at all -- and that includes ARMs. Some of the riskiest products, such as one- and two-year ARMs with interest rates that spike after the introductory period, have been all but removed from mortgage lenders' menu of options. But a wide range of ARMs are still available, ranging from 3/1 ARMs to 10/1 ARMs, as well as option ARMs. The interest rate on a 3/1 ARM would remain the same for the first three years and then adjust each years after that. A 10/1 ARM would hold the initial rate for the first 10 years. An option ARM permits borrowers to choose how they wish to make their payments each month: a traditional, fully amortizing payment; an interest-only payment; or a minimum monthly payment that is often not enough to cover the interest due.

And while ARMs still carry risks, it doesn't mean you shouldn't consider one if you want to buy a home. Educated and budget-savvy buyers in certain situations stand to reap significant financial benefits by using an ARM over a traditional fixed-rate mortgage. If you meet these guidelines, an ARM still may be right for you.

4 key reasons Millions have experienced the dangers of ARMs, but they still make lots of money sense for savvy and qualified buyers.

Still consider an ARM if: 1. You're good with your money 2. You don't plan to stay in a house long 3. You expect significant salary increases and bonuses 4. You've looked beyond your personal finances