Fixed rate and adjustable rate mortgages each have pros and cons. Fixed rate mortgages are in one way advantageous because the payment amount (principal and interest) does not change for the term of the loan (typically 15 or 30 years). This can help families keep within a budget. However an ARM can provide a lower payment, especially during the first few years of the loan. However, budgeting may be difficult, because, when the ARM rate changes, it can cause the monthly mortgage payment to skyrocket.

Some ARMs prevent the interest rate from rising within the first few years (sometimes called the adjustment period). Some ARMs also have “caps” to prevent borrower default. Some caps are essentially limits on the total possible rise in interest rate. Other caps are limits on the frequency of interest rate changes. Fixed rate loans do not include caps, as the interest rate remains fixed for the life of the loan.

ARMs can be useful if the owner plans to live in the home for a short period of time. For instance, if you plan on selling within five years, it would probably be advantageous to take a “5/1″ adjustable rate loan. The 5 refers to the initial interest rate term (5 years), and the 1 refers to a 1-year interest readjustment period. In other words, the interest rate will be recalculated, based on a market index, every one year. So, the owner of the house would enjoy a low fixed interest rate for five years, after which the rate would change (and likely increase). But, if the owner sells within this period, no extra interest payments will ever be made. If you plan to live in a house for five years and take out a fixed rate mortgage, your monthly expenditure will likely be more, since fixed rate mortgage interest rates are typically higher than the initial rates offered by ARMs.

While fixed rate loans are the “classic” mortgage in the United States, ARMs have gained some popularity. However, during the last few years, some buyers purchased homes with ARMs that had very low initial interest rates. When the interest rates went up and home values plummeted, many of these buyers found themselves “upside-down” in their mortgages. In other words, their homes were worth less than they owed. While ARMs are not evil, many of the so-called “predatory loans” made in the last few years were ARMs with low initial interest rates (sometimes referred to as “teaser rates”).

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A: Usually used in the context of car loans, the term “upside down” means that the car is worth far less than the amount of money owed on the loan. For example, let’s say that you owe $15,000 on a car that is only worth $7,000 – in this case, you are “upside down” by $8,000.

Many car buyers end up upside down in auto loans because they buy more car than they can afford at terms that they should never accept. Car dealers are all to eager to dangle low-monthly payment options in front of an unsaavy car buyer, knowing that once he accepts, the dealership will make a killing as the customer proceeds to make years of interest only payments, never reaching the actual principal. Under these terms, it can take a decade or more to finally pay off a car loan.

Remember, it is almost always a mistake to agree to any auto loan with a term of more than 60 months. If you can’t afford to make the monthly payments on a 5 year loan, you can’t afford the car.

Exacerbating the situation is the fact that automobiles depreciate faster than you can say the word “boondoggle.” Most new cars lose half of their value in a short 18 months, leaving most anyone with a loan term of more than 36 months upside down fairly quickly.

If you are upside down on an auto loan, you’re not alone. A recent Money Magazine survey showed that nearly 30% of new car shoppers are upside down in their current car loans.

Getting out

Unfortunately, there isn’t a lot you can do to get yourself out of this situation, other than pay off the loan as quickly as possible. And remember next time you buy a car, if you can’t afford the monthly payments on a 5 (or better, 3) year loan, you can’t afford the car!