If one is investing in real estate and has decided to use an adjustable-rate mortgage (ARM throughout the rest of the article), then they must be positive that they are well-prepared to push aside the lender's antics and evaluate the different loans using their own knowledge and information. In the list below, five vital tips for evaluating an ARM are mentioned along with a brief explanation of each.

1.) Check the Periodic Interest Rate Adjustment Cap - This is the nasty fellow that can cause negative amortization and the end of one's real estate endeavors. When shopping for an ARM, make sure that it has a cap on the periodic interest rate increase. Most ARMs adjust their rates every six or 12 months, but some are shorter such as monthly. Often caps of 2% are placed on the rate increase amount, but if there is no cap this means that during times of rapid rate increases, the borrower's loan payment will get completely out of control.

2.) Check Monthly Mortgage Payment Cap - This tip goes hand-in-hand with tip one. Sometimes the lender performs trickery where they will cap the monthly payment, but not the periodic interest rate adjustment. When this happens, the interest owed by the lender may cause the monthly payment to increase, yet the payment doesn't increase because the monthly mortgage payment is maxed-out at its cap. This causes the interest to then be added to the loan balance, and PRESTO....the borrower is paying interest to the lender until they die or pass the burden to their children! Payment caps are fine, but make sure the periodic interest rate increase is also capped.

3.) Lifetime Interest Rate Cap? - A good ARM will often have a cap on the amount the loan