ARMs sometimes offer greater borrowing power and lower costs with risks you can manage

To help borrow a larger amount, many people rely on ARMs. In practice, (though Freddie Mac, regulators, and critics—who think ARMs attract too many people who borrow more than they can afford to repay—are pushing for restrictive changes), an ARM will qualify you for a larger loan than a fixed rate (other things equal). However, besides the qualifying advantage, ARMs may also save you substantial interest costs.

At first you might think, "No way would I take an ARM. Rates may head up. I want to sleep well, not toss and turn worrying about skyrocketing mortgage payments."

Yet, after you figure the benefits, costs, and risks, you might find that some types of ARMs clearly beat the 30-year fixed-rate mortgage.

Caveat: No set cost-benefit relationship prevails. Sometimes ARMs look attractive relative to 30-year, fixed-rate mortgages; sometimes their advantages narrow or disappear. Terms and rates also vary among lenders. Rather than sell to Fannie Mae or Freddie Mac, some lenders hold ARMs in-house. These portfolio lenders set their own rules and rates rather than follow the standards issued by the secondary mortgage market. So, shopping for ARMs may turn up a bargain. Consider the experience of the Klar family from several years back.

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