Let's look at the worst possible senario. It is conceivable that next year your rate will be 10 3/4 percent, having been bumped up the 2 percentage point cap. Then, your monthly mortgage will be $933.49, which is $37.88 higher than it would have been had you obtained a 30-year mortgage. However, you still are saving because you have not paid any points. Indeed, in year three, your rate can jump to 12 3/4 percent, where your monthly payment would be $1,086.70. Now, the adjustable rate mortgage is going to cost you $190.59 a month more than it would have had you taken the fixed 30-year rate. If you multiply this out over an additional one-year period, you begin to see that you have now eaten into the point savings that the adjustable originally offered you.

Can you afford the higher monthly mortgage payment? If you are on a fixed income, and are concerned that a monthly mortgage payment of 12 percent or 13 percent will not be financially possible for you, then you probably should "bite the bulllet" and take the fixed 30-year rate. If, on the other hand, you are not that concerned about the fluctuating rate, or you anticipate that your salary will increase significantly over the next few years, then again you might be willing to take a gamble on the adjustable rate.

There is, of course, one solution that may permit you to have your cake and eat it too. Many lenders are offering what is known as a convertible feature on the adjustable rate mortgage. That means that you can initially take out an adjustable rate, and whenever you decide to switch to a fixed rate, you have the option to do so, by the payment of a point or two. Discuss these features with your lender, to make sure that such a option is available to you, in the event you ever decide to take the security of the fixed rate mortgage.