They are worth taking a look at.
Basic Options
Here is a brief list of some of the options you may want to add to your loan.
Caps
An interest-rate or payment cap places a limit on the amount your interest rate or monthly payment can increase. Obviously, anything that provides protection against interest rate hikes is a very good idea, so pay close attention to the cap. Although we've listed it here as an option, a cap is really a must. Avoid any ARM that does NOT have a Cap.
Caps come in three versions:
1 - Periodic caps, which limit the interest-rate increase from one adjustment period to the next;
2 - Overall caps, which limit the interest-rate increase over the life of the loan, and
3 - Monthly payment caps, which limit the total amount your monthly payment can increase from one adjustment period to the next.
Longer Term ARMs
You can limit your risk by choosing a longer term ARM, such as a 5/1 or 7/1, where the interest rate is fixed for five or seven years. The tradeoff is you'll probably pay a slightly higher rate than a typical ARM in exchange for that sense of security.
Balloon
These loans offer a lower rate during a set initial period, after which the rate "balloons" to a higher level. A balloon loan is only a good idea if you're absolutely sure you'll be selling your home or refinancing before the loan matures.
Making a Decision
Take a good look.
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