It has taken 10 years to integrate adjustable-rate mortgages (ARMs) into the home lending system, but it has also taken 10 years to bring some rules to the business.
ARMs are expected to make up about half of all new mortgages written this year, and some of the people taking out those mortgages could face some perilous times when their adjustable mortgages pull their monthly payments out of the affordable range.
In this situation, many financial advisers are cautioning against ARMs, urging their clients to hold out for a fixed-rate mortgage - even if it means higher monthly payments or having to wait a little longer to build up savings for a larger down payment.
Still, in some markets and some particular circumstances, families have found it impossible to buy a home without an ARM. It is for these people that some guidelines are needed.
Some guidelines have arrived. They are supposed to help lenders, but home buyers should find them useful.
The guidelines come from the Federal Home Loan Mortgage Corporation (''Freddie Mac'') and the Federal Home Loan Mortgage Corporation (''Fannie Mae''), two government-initiated businesses that buy packages of mortgages from lenders so those lenders can have more money available for future borrowers. If the mortgages don't meet these guidelines, neither Freddie Mac nor Fannie Mae will buy them.
Not all lenders sell their mortgages to these corporations, however, so home buyers still have to be alert to loans with low ''teaser rates'' that can take painful jumps in a few years. Then there are loans for which the monthly payments do not move much, but the term of the loan is lengthened, meaning you have to spend more years paying it off or you don't have as much equity as you expected to have when it comes time to sell.
So if these rules are good enough for Freddie Mac and Fannie Mae, it is probably not a bad idea for home buyers to be aware of them, too, and make sure the ARM they get doesn't come with a choke hold:
* Freddie Mac, for instance, wants lenders to see that borrowers are qualified to pay a rate that reflects the cost of the mortgage over the life of the loan - not just the initial discount or first-year rate, to avoid ''payment shock'' later.
* Lenders must also consider the size of the payment adjustments home buyers are apt to face over the life of the loan. What is the likelihood of large payment increases and the ability of the borrower to handle them?
* Freddie Mac has also placed limits on the size of rate adjustments and payment adjustments. (Some lenders change the size of the rate, others adjust the size of the payment, with a slight difference in payment changes.) To be ''Freddie Mac-able,'' a mortgage-rate adjustment is limited to 0.083 percent in the first six months, 0.5 percent between six months and one year, 1 percent in the second year, 2 percent in the third year, 3 percent in the fourth, and 3.5 percent after the fourth year.
On a $50,000, 30-year loan on which monthly payments start at $514.31, this would limit increases in those payments to a maximum of $132 after four years (see table).
* Fannie Mae has also tried to bring some rules to the ARM game. All ARMs that Fannie Mae buys will have to have an interest-rate cap, a payment cap, or both. It has also limited its purchase of ARMs to those mortgages with first-year discounts of not more than 2.5 percent below Fannie Mae's posted market rates, another way to discourage teaser rates.
For most lenders, these guidelines do not pose a great hardship. In June, the US League of Savings Institutions surveyed 1,100 lenders and found that while 55 percent of them did use low promotional rates, they built extra safeguards into these loans to make sure borrowers could meet the payments now and in the future. Although these tighter rules have shut some people out of the housing market and may have helped slow home sales in recent months, they are expected to mean fewer foreclosures down the road.
If you're about to start home and mortgage hunting, ask the lenders you talk to if the mortgages they're planning to offer you can be sold to Freddie Mac, Fannie Mae, or both. Also ask the lender to show you a ''worst case'' scenario of what monthly payments could be if you reached the maximum adjustment level on the ARM. You might be able to afford it if the payments went up from $514.31 to other factors like property taxes and utilities. They will probably cost more by then, too.
If you would like a question considered for publication in this column, please send it to Moneywise, The Christian Science Monitor, One Norway Street, Boston, Mass. 02115. No personal replies can be given by mail or phone. References to investments are not an endorsement or recommendation by this newspaper. Freddie Mac's ARM guidelines
Maximum rate increases on an adjust able-rate mortgage, to qualify the mortgage for purchase by the Federal Home Loan Mortgage Corporation. Maximum payment increases based on a $50,000 mortgage where monthly payments start at $ 514.31.
Rate Maximum Maximum Adjustment rate payment period adjustment increase Less than 6 months 0.083% $ 3.20 6 months or more but less than 1 year 0.5% $ 19.20 1 year or more but less than 2 years 1.0% 2 years or more but less than 3 years 2.0% $ 76.51 3 years or more but less than 4 years 3/0% $114.21 4 years or more 3.5% $132.00 m