RM advantages

• Rates and payments remain constant. There won't be any surprises even if inflation surges out of control and mortgage rates head to 20 percent.
  
• Stability makes budgeting easier. People can manage their money with more certainty because their housing outlays don't change.
  
• Simple to understand, so they're good for first-time buyers who wouldn't know a 7/1 ARM with 2/6 caps if it hit them over the head.

FRM disadvantages

• To take advantage of falling rates, FRM holders have to refinance. That means a few thousand dollars in closing costs, another trip to the title company's office and several hours spent digging up tax forms, bank statements, etc.
  
• Can be too expensive for some borrowers, especially in high-rate environments, because there is no early-on payment and rate break
  
• Are virtually identical from lender to lender. While lenders keep many ARMs on their books, most financial institutions sell their FRMs into the secondary market. As a result, ARMs can be customized for individual borrowers, while most FRMs can't.

All of these things should factor into your decision between a fixed-rate mortgage and an adjustable one. But there are other important questions to answer when deciding which loan is better for you:

1. How long do you plan on staying in the home?
If you're only going to be living in the house a few years, it would make sense to take the lower-rate ARM, especially if you can get a reasonably priced 3/1 or 5/1 ARM. Your payment and rate will be low and you can build up more savings for a bigger home down the road. Plus, you'll never be exposed to huge rate adjustments because you'll be moving out before the adjustable rate period begins.

2. How frequently does the ARM adjust, and when is the adjustment made?
After the initial fixed period, most ARMs adjust every year on the anniversary of the mortgage. The new rate is actually set about 45 days before the anniversary, based on the specified index. But some adjust as frequently as every month. If that's too much volatility for you, go with a FRM.

3. What's the interest rate environment like?
When rates are relatively high, ARMs make sense because their lower initial rates allow borrowers to still reap the benefits of homeownership. The chances are fairly good that rates will fall down the road too, meaning borrowers will have a decent chance of getting lower payments even if they don't refinance. When rates are relatively low, however, FRMs make more sense. After all, 7 percent is a great rate to borrow money at for 30 years!

4. Could you still afford your monthly payment if interest rates rise significantly?
On a $150,000, 1-year adjustable-rate mortgage with 2/6 caps, your 5.75 percent ARM could end up at 11.75 percent.

Fed doesn't blame shaky economy on oil prices

Year of ARM	Rate	Monthly Payment
First year	5.75%	$875
Second year	7.75%	$1,075
Third year	9.75%	$1,289
Fourth year (6% lifetime cap)	11.75%	$1,514 ( $639 more than first year)

Now, let's compare this worst-case ARM scenario to a fixed-rate mortgage:

Interest rate during 4 years	Total payments during 4 years
ARM: 5.75% to 11.75%	$57,036
Fixed rate: 7.75%	$51,600
Savings with FRM over 4 years: $5,436

In the above case, the fixed-rate mortgage costs less than the worst-case ARM scenario. Experts say when fixed mortgage rates are low, they tend to be a better deal than an ARM, even if you only plan to stay in the house for a few years.