Be your own expert on whether an ARM will squeeze you out

More — but still a minority — of mortgage seekers are willing to gamble. The better they assess their personal risk, the less likely that they’ll regret rolling the dice.

In May, some 10% of borrowers opted to trade a lower initial interest rate on an adjustable-rate mortgage (ARM) rather than take a higher rate that stays fixed for the life of the loan.

The lower ARM rate (and monthly payment) only lasts for a specified period, such as three, five or seven years.

Before approving borrowers for an ARM, lenders usually examine whether their current income and credit profile will support a higher rate charge than the initial charge — often about 2 percent higher, explains Charles Chedester, of Iowa based Midwest Family Lending.

Rate adjustments rise or fall in tandem with an index, which reflects where market rates are, but also are “capped” not to rise above a certain limit. Annual hikes come after that first initial period but are typically more limited than the rise allowed at the first adjustment.

Ask the lender to fully explain how, when and by how much rates can rise over the life of the loan, Chedester suggests. Also ask what rate is being used to qualify you.

By underwriting at a higher rate, lenders are ensuring that borrowers will have enough money to keep their home.

But the numbers a lender sees don’t reveal what borrowers are planning for their future.

For instance, someone planning to buy lots of furniture after moving in or a buyer who’ll need another car for his new commute should weigh if those payments will crimp their budget once rates tick up.

A healthy fear of how easy it will be to pay should the highestrate scenario occur is protection against being forced to sell due to unmanageable payments.