A Suze Orman exclusive

Your home is a place to live in; it should be a place of security, not something that puts you and your family at great risk. When it comes to mortgages, fixed rate loans are low-risk, while adjustables can have as much risk as a tech stock, circa March 2000. Let me explain.

When we refer to "fixed" and "adjustable" we're talking about the interest rate on your loan. A fixed rate will never be changed for the life of the loan. If you take out a 30-year fixed rate loan today at 5.5 percent, it will always remain at 5.5 percent. If 10 years from now the new market rate for a 30-year fixed rate is 8.5 percent, you don't have anything to worry about. You just keep on paying 5.5 percent.

Now it's not going to take a rocket scientist to guess what happens with an adjustable. Yup, the interest rate can be adjusted. How often you ask? By how much? It depends. I'll get into the details in Section 4, but for now let's keep it simple: your initial rate is going to be less than what you can get for a fixed rate. Right now, some ARMs come with interest rates below 4 percent. That's a 1.5 percentage point difference from the fixed rate. On a $150,000 mortgage, the fixed rate ($851) will cost you $135 more a month than the adjustable ($716). I bet you're getting ready to send Alan a thank-you note for pointing this out. Hold on a sec, compadres.

The risk you assume with an ARM is that when your loan comes up for an "adjustment" - it could be in one year, three years, or as many as 10 years - interest rates are going to be higher. That means the lender is going to jack up your ARM. The maximum annual adjustment is typically two percentage points, with a lifetime cap of about six percentage points. (Again, more details on all of this in Section 3). Since I am a big believer in preparing for the worst, then hoping for the best, let's see what would happen if within the next year some unforeseen event caused the economy to take off like gangbusters, triggering a rise in interest rates. If you have a 1-year adjustable, your 4 percent interest rate could shoot up to 6 percent. (Remember, the conservative guy next door with the fixed rate loan is gonna keep paying 5.5 percent.) If things continue to heat up and rates head even higher, your next adjustment could be up to 8 percent. Ultimately you could see the rate go as high as 10 percent. (Just to drive this home one more time: that's practically twice as much as the conservative guy next door whose fixed rate is still 5.5 percent.)

I can't resist putting some numbers to this. On our $150,000 mortgage, the 5.5 percent fixed rate loan is still going to run $851 a month, but the ARM would cost $899 a month at 6 percent, $1,100 at 8 percent, and $1,316 at 10 percent.

And don't you dare try to tell me you'll never get in that situation because you'll refinance your ARM long before it gets out of hand. Puh-leeze. Unless you possess some special potion that allows you to control the future, there is absolutely no guarantee that you will be able to refinance. What if you become ill and can't work full time? Or what if you lose your job just when you were planning to refinance? Lenders are not going to be too excited to refinance based on your weaker financial picture.

I also find it so dangerous how conversations about real estate assume values will never go down. It's as if there's no risk that you could be unable to refinance because your equity in the home may have fallen. I have no sense that we are in for a real estate decline, but my goodness, how can everyone blithely assume it could never happen? It's not exactly unprecedented, my friends. The early '90s were a crappy time for real estate. Prices were falling everywhere. None other than Donald Trump nearly had to fire himself. Sure he's worth billions now, but his real estate holdings got him in deep deep trouble back in 1991 when he was $900 million in debt, thanks to the lousy real estate market.

You get my point: there are plenty of risks with ARMs. But I'm not suggesting ARMs are always a bad idea. I think there are indeed situations where ARMS can be a terrific way to go. We'll get to that in Section 3. First though, a quick take on why Greenspan is suddenly so hot on ARMs.