Highest ARM Payment Test

When evaluating an ARM [adjustable rate mortgage], one can be left with a faintly queasy feeling. How do you evaluate it? Well, one way is to go with the higher ARM payment test. To do this, determine the highest possible interest the lender can charge with the loan. Now figure out what that would equate to in a monthly payment. If you can’t make the payment, don’t take on the loan! Obviously, this is a worse case scenario, but it gives you an idea of the obligation you are taking on.