The lower interest rate - and lower payments - on the ARM make it an attractive option to the traditional fixed-rate mortgage.

But, experts say, the low number isn't the only factor in the equation.

"What has the best rate may not be the best for you," says Mac Grisham, president of Southeastern Mortgage of Tennessee.

You have to consider both your present situation and your plans when you're deciding whether to go the fixed or adjustable route, says Bonnie O'Dell, director of consumer affairs for Fannie Mae, the Federal National Mortgage Association in Washington, D.C.

Generally, the less time you think you'll be in the house, the better an ARM should look to you.

ARMs and "balloon" mortgages - they have a fixed rate for, say, five or seven years and a large balance to be refinanced at that time - have similar advantages for buyers who know they'll be in their houses for only a few years, says John Walker of Franklin National Bank.

"The way for you to get full advantage of an ARM or balloon is to completely look at the short term," he says. "If you have a five-year balloon and you know you'll only be in your house for four years, that's good.

"But if you know you'll be in the house for eight or nine years, you might just as well be in a 30-year fixed loan."

Especially when the difference in the rates is less than two percentage points. (See mortgage rate chart on this page for current rates.)

ARMs start getting more attention when interest rates are on an upward track.

Many of those ARM fans, however, are going adjustable for the wrong reason, Walker says.

"When they say, `I can get more house with an ARM because the initial payment is lower,' that's the wrong reason. Don't go into an adjustable just because you can afford more that first year," he warns.

"On an ARM, you should try to look at the second year and the potential rate increase."

Borrowers who signed up for ARMs last year are facing rate increases that will have them at rates about equal to today's fixed-rate loans, Walker says.

Another myth about ARMs is that a borrower can qualify for a larger ARM than they can a fixed-rate loan. Not true, Walker says.

Most guidelines call for borrowers to qualify at the maximum first adjustment, or 2 percent over the initial rate, he says.

"It's not a good idea to go into a house on an adjustable simply because you can't scrape together a fixed," says Fannie Mae's O'Dell.

"If you have very strong expectations that your income is going to increase, you might be fine.

"An adjustable mortgage is going to adjust, and you have to pay or you risk losing the house."

The rate on an adjustable-rate mortgage doesn't bob up and down on its own.

Most one-year ARMS have what's called a "2/6 cap," meaning the rate can adjust up or down no more than two percentage points each year, and no more than six percentage points over the life of the loan.

Because the first-year rate, or teaser rate, is deeply discounted, it almost certainly will rise the second year.

The interest rate - and its potential for change - isn't the only number borrowers need to watch, Grisham says.

Borrowers also need to check out how many points and other fees lenders are charging when they're comparison-shopping loans.

So buyers should be prepared to ask, and answer, lots of questions.

"What we tell our people is to try to fit the person into what's best for them," Grisham says. "You can only do that by asking certain questions."

A good lender will discuss the pros and cons of all loan programs, whether they be a one-year ARM, a five-year balloon or a 30-year fixed loan, Walker says.

"Most lenders have most programs, or they have access to them.

"Somebody who hasn't done this several times before . . . needs to sit down with their lender and get a good understanding of their options."

"Buyers need to be smart, not greedy," he says.

Buyers need to shop around, O'Dell says.

"If you're going to buy a car or a washing machine, you want to know how it runs, the mileage you get, so you do lots of research and ask lots of questions," she says.

An adjustable-rate mortgage will save you money over a fixed-rate mortgage - for a while.

But after the rate starts adjusting, the savings start disappearing.

ARMs vs. fixed rate

Mortgage research firm HSH Associates, in Butler, N.J., calculated what you would pay during the first few years on a 30-year fixed-rate mortgage and a one-year ARM, both for $100,000.

The fixed-rate loan has a rate of 8.36 percent and the ARM starts at 6.07 percent. It has a 2 percent annual adjustment and a 6 percent lifetime cap, so HSH assumed the worst and plugged in the maximum each year.

On the fixed-rate loan, you'd pay $759.01 a month, and a total of $32,893 in interest after four years.

On the ARM, your monthly payments would be $604.05 a month the first year, increase to $735.75 the second year, adjust again to $874.28 the third year and hit $1,017.78 in the fourth year, with an interest rate rising to 12.07 percent. The interest you'd pay during that time: $35,513.

The ARM starts out less, but has you paying about $2,600 more in interest over the first four years.