Adjustable-rate mortgages sometimes seem like a ticking time bomb because the attractive interest rate only lasts for a set period — usually three, five or seven years — before it begins fluctuating annually. Thanks to the lower rates they offer initially, though, ARMs can be a better alternative to fixed-rate mortgages in some circumstances.

ARMs are a good bet if the rate is markedly lower than for a 30-year fixed loan, and the borrower plans to sell the house or pay off the mortgage before the term expires and the rate adjusts, says Greg McBride, senior financial analyst with Bankrate.com.