Jack used to think that the only way to finance a home was to take out a 15- or 30-year fixed-rate mortgage. If he needed to refinance his loan, he found himself at the mercy of interest rates. If his timing wasn't right, he was unable to make a move until the rates produced a monthly payment that he could afford.

Then Jack met Jill. She was a big proponent of adjustable rate mortgages (ARMs). They offer a low introductory rate for periods that typically include one, three, five, or seven years, at which point they adjust up to a higher rate. Because the lower beginning rate means a lower mortgage payment, Jill told Jack that he could refinance once the rate expired. Jack was interested, so Jill gave him some more details.

The pluses of refinancing

Jill told Jack that when she took out her ARM, she planned to either refinance the mortgage or move to a different house once the introductory rate expired. Either way, she didn't believe she would have the same mortgage when the introductory period ended. If she did, she knew that those small loan payments would come to an end. Rates generally bump up 2 to 5 percent at the end of an introductory period, which can easily add an extra $200 on a $1,000 mortgage payment.

Jill also pointed out that the typical homeowner moves or refinances approximately every five years. Knowing that she would eventually want either a bigger house, or to tap her equity to improve her current abode, she decided that locking into a long-term mortgage didn't make much sense.

A refinancing drawback

There was a drawback that Jill acknowledged. There's a great sense of security with a 15- or 30- year fixed rate mortgage. With an ARM, you don't know what the rate environment will be like when your introductory mortgage rate expires. Rates could skyrocket, forcing you into paying a higher monthly loan amount, even if you wind up refinancing to another ARM.

If you're like Jack, and an ARM seems like a potential refinancing option, consider Jill's words of wisdom. Take a serious look at the low upfront interest rate and great monthly savings, as well as the chances that you may be moving or refinancing in the future. Then, consider whether you're willing to accept the trade-off of long-term security for short-term savings. If you are, an ARM could be your lending choice.