A Suze Orman exclusive

If you plan on moving in a few years - say you're a first-time buyer who hopes to trade up, or a retiree who is looking to downsize - adjustable rate mortgages can be a great deal.

A relatively new type of ARM, called a hybrid, allows you to lock in a fixed rate for a period longer than the old norm of one year before you start getting hit with the adjustments. There are 3-year, 5-year, 7-year and even 10-year hybrid mortgages. You can literally pick an ARM that matches your moving intentions. Plan on moving in four years? Play it safe and go with the 5-year hybrid. Plan to trade up within the next 10 years? Go for the 10-year hybrid. Your interest rate is going to be lower than on the 30-year fixed, and your strategy is to get rid of that mortgage long before it comes up for its first adjustment.

For example, on a 5-year hybrid (known as a 5/1) your interest rate is fixed for five years before it switches to an ARM that can be adjusted every year. The payoff? The current rate on a 30-year loan is 5.5 percent, but it is just 4.5 percent on a 5/1. On a $150,000 loan, that's a monthly difference of more than $90. If you invest that savings each month in a conservative short-term bond or money market account you could have nearly $6,000 saved in five years. (Check out the Yahoo! Finance Mortgage Center for daily mortgage rates.)

I sure hope your planning plays out exactly like you expect - and you move well before any adjustment kicks in - but you still need to prepare for the worst (where have you heard that before?). That means doing some math so you can understand what would happen if your circumstances change and you're still in the house (with the same mortgage) long after the lock-in period has expired.

ARM Mechanics
You need to understand three basic elements of every ARM:

A. Index and Margin
Where do lenders come up with the interest rate on your loan? No, they aren't pulling it out of a hat. Adjustable rate mortgages are pegged to an index. Typically, a lender will add one, two, or up to seven percentage points to the index rate - this is what's known as the margin - to set your ARM rate.

When you are loan shopping you need to understand which index the lender uses.

Among the most popular indexes for ARMs:

• Six-month U.S. Treasury Bill index
• U.S. Treasury one-year Constant Maturity Securities index.
• 11th District Cost of Funds Index (COFI), which is just a fancy name for the interest banks in the western U.S. are paying on deposits.
• The London Interbank Offer Rate (LIBOR), which is what most international banks charge each other on large loans.

You want to get an index that is fairly stable, meaning it is slow to adjust to changes in rates. That's because rates are near their historical lows right now; if we do see any movement it is going to be up, not down. So you'll want an index that is slow to reflect the rise. Historically, the six-month T-Bill and one-year Constant Maturity Securities indexes have been the best indexes for a low-rate environment.

B. Adjustment Cap
Typically, your ARM can be adjusted once a year. But you'd better make sure that's the case. Some adjust every month, or twice a year. Ask, Ask, Ask. And the typical annual adjustment max is two percentage points. To protect yourself from a first-adjustment shocker, I recommend calculating what that difference would be (check out the Adjustable Rate Payments Calculator on Yahoo! Finance) and then start setting aside that amount every month for a year before you are scheduled for your first rate adjustment. That way, if the first adjustment is the max, you've got a nice insurance policy you can tap: your own savings.

C. Life-Time Cap
This is the worst-case scenario number you better get comfortable with.How high can your rate go over the life of the loan? The typical max is six percentage points. Make the lender calculate what that translates to in dollar terms. Can you handle that?