Are you willing to chance a low-rate mortgage?

No matter what today's conventional 30-year mortgage rate is, howwould you like one that is two points lower? You can probably get aloan that low with an adjustable-rate mortgage, but you have to takesome risks.

It would also help to have a good idea of how long you plan tostay in your home. Like 30-year mortgages, ARMs are hitting recordlows, said Doug Perry, first vice president of the consumer marketsdivision for Countrywide Home Loans in Los Angeles.

A low-rate ARM is definitely the right loan for some people, hesaid, but not for all. To help you decide if you could benefit fromthis type of mortgage, let's look at how an ARM operates.

If you get a conventional 30-year mortgage at 61/2 percent, forexample, that is your rate for as long as you keep that mortgage. Itdoesn't matter where interest rates go because your rate will stay at61/2 percent. An ARM is also a 30-year loan, but the interest ratewill change. Let's look at a one-year ARM as an example. You might beable to get a one-year ARM with a rate that is 2 percent lower thanyou would get on a 30-year fixed. Of course, you might also have topay a point--one percent of the loan--in order to get that rate.

Perry noted that the shorter the term of the loan, the lower therate. That's because it's easier to figure out where interest ratesmight be at the end of one year than it is after two years. Even ifthe lender gets it wrong, there is not as much risk involved becausethe loan will either be paid off or a new interest rate will kick inat a predetermined time.

If you know that you will be moving in a year or two, or eventhree, then it might make sense to go for an ARM and get the lowestpossible rate for the time you will be in the house. One thing tolook at with ARMs is the cap--the limit on how high the rate canclimb and how long it will take to get there. Perry said that withCountrywide, as with most other lenders, there are both caps and loanlimits. At Countrywide the loan rate will never go up more than 2percent in one year, and it will never go more than 6 percent abovethe initial rate.

Let's look at a "worst case scenario," Perry suggested. Let's saythat the current rate for a 30-year fixed-rate loan is 61/2 percent,and you get an ARM for an introductory rate of 45/8 percent. At theend of the first year your rate could go no higher than 65/8 percent,which is close to what you would have paid for the first year on a 30-year loan. The rate, however, could climb to 85/8 percent at the endof the second year.

Let's look at what this means in terms of actual money whencompared with a conventional, 30-year mortgage at 6.5 percent on a$150,000 loan. Your monthly payments (principal and interest only)would be $948.10 per month, which would add up to $34,132 over thefirst three years of the loan. With the adjustable rate starting at45/8 percent, your payments the first year would be $771.21 per month(principal and interest only), but your interest rate could reach 105/8 percent (assuming a 6 percent limit) at the end of three years.During the first three years of the loan, your principal and interestis close to what the 30-year fixed rate would cost, but then youwould begin paying more.

The problem with the ARM begins when your rate is at 105/8 percentand the fixed rate remains at 61/2 percent. It is obvious that themajor savings with an ARM come in the first couple of years when theintroductory rate is low.

Remember, too, that the above was a "worst case scenario." Theinterest rate on an ARM does not necessarily rise the maximum amountevery year. The interest rate usually is based on the interest rateon the 1-year TCM (one-year Treasury bill). If the interest rateremains steady, the mortgage rate will remain steady. If the interestrate goes down, the mortgage rate will go down.

The important questions are what are your objectives and plans?Perry said you should discuss them with your lender. The lender wantsyour business and knows that you will be talking to other lenders soit is in his/her best interests to make the best possible deal foryou.

"There is no one loan that fits everyone," he added. "That's whywe have more than 80 different first mortgage products, and why anumber of them are ARMs."

It is important to shop around, and to watch what rates are doing.Perry points out that rates can change on a daily basis.

"Gone are the days when rates changed once a week," he said.

Some ARMs will hold their introductory rate for two years beforejumping. Others will stay the same for three or four years, and somerates will actually go down for a year or two before they go back up.

If you figure out how likely you are to be in that house in one,two, three or more years, you can figure out what sort of loan youreally want--and it just might be one at 45/8 percent.

Bill Steele is financial editor of Interest.com, a nationalpublisher of mortgage rates and information. Consumers can viewadditional mortgage information on the Internet at www.interest.com.