Adjustable Rate Mortgages or "ARMS" have been demonized and blamed for much of the foreclosure debacle but they are a useful mortgage product for certain situations.

An ARM might be a good option for you if:

• You want to lower your monthly payments temporarily
• Need to qualify for a larger loan amount
• You are staying in your home for a short time period (7 years or less)

There are two types of ARMS. A FULLY AMORTIZING ARM, which means your payments reduce the principle of the mortgage during your term and an INTEREST ONLY ARM, which only pays the interest during your term.

ARMs have their own lingo which makes them intimidating but its really quite simple. For example, lets take the following product:

5/1 LIBOR ARM 3/2/5

This means the ARM will adjust based on LIBOR. LIBOR stands for the London Inter Bank Offer Rate and it is a standard financial index used in U.S. Capital Markets. The quote can be found daily in the Wall Street Journal.

The "5/1" means the mortgage is fixed for 5 years and then changes every year thereafter.

The 5/2/5 are what are knows as "caps". Caps are safeguards which you should be familiar with. They state the maximum changes the ARM will experience.

In this example "3/2/5" means the following.

The first "3" is the "initial" or "first adjustment" cap. It means that after the 5-year fixed period. The rate could adjust 3% up or down by 3 percentage points.

The second number, "2", is the cap for the "subsequent annual adjustments". After the first adjustment, the rate can change by 2 percentage points at the maximum.

The final number in this example, the "5", is the "lifetime cap". This limits the ARM rate increase to 5 percentage points over the initial rate during the loan term.