An adjustable rate mortgage could mean a lower monthly payment for a while. Be sure you fully understand the risks

As interest rates go up, it may be a good time to look into a variable rate mortgage.

The lower initial interest rate can be the appeal of an ARM. The rate can change in your favor down the road.

There is a lot of variability in how much the rates can go up and how quickly.

The housing market is posing affordability challenges for buyers and has led to a rise in interest rates. The median list price of a home in the U.S. is up from a year ago.

The Federal Reserve Bank of St. Louis says the average fixed rate on a 30-year mortgage has risen to its highest level in nearly a year.

The initial interest rate is fixed for a period of time.

The rate could go up or down after that. A fixed-rate mortgage is riskier than an ARM. This holds true for both the purchase of a home and the refinance of a loan on a home you already own.

There are a few things to know if you are exploring an ARM.

The name of the ARM should be considered. The introductory rate lasts five years, and after that the rate can change once a year.

Don't just think in terms of a 1% or 2% increase. Could you cope with a maximum increase?

There is an introductory rate of 3/1, 7/1, and 10 years with some lenders.

Knowing when the interest rate could change and how often is important, but you need to know how much the adjustment could be and what the maximum rate could be.

"Don't just think in terms of a 1% or 2% increase," said Mendels.

The margin is an agreed-upon percentage point used by mortgage lenders to arrive at the total rate you pay.

If the lender uses an index of 1% and your margin is 2%, you will pay 3%. If the index is 2% after five years, your total would be 4%. 5% after five years, if the index is at? Depending on the terms of your contract, your interest rate could go up a lot.

The caps on the annual adjustment and over the life of the loan are usually included in an ARM. It's important to fully understand the terms of your loan because they can vary.

• Initial adjustment cap. This cap says how much the interest rate can increase the first time it adjusts after the fixed-rate period expires. It's common for this cap to be 2% — meaning that at the first rate change, the new rate can't be more than 2 percentage points higher than the initial rate during the fixed-rate period.
• Subsequent adjustment cap. This clause shows how much the interest rate can increase in the adjustment periods that follow. This number is commonly 2%, meaning that the new rate can't be more than 2 percentage points higher than the previous rate.
• Lifetime adjustment cap. This term means how much the interest rate can increase in total over the life of the loan. This cap is often 5%, meaning that the rate can never be 5 percentage points higher than the initial rate. However, some lenders may have a higher cap.

Buyers who anticipate moving before the initial rate period ends may want to consider an ARM. It is wise to consider the possibility that you won't be able to sell or move because life happens and it is impossible to predict future economic conditions.

Stephen Rinaldi, president and founder of Rinaldi Group, a mortgage broker, said that he would be concerned if the market corrected for whatever reason.

Rinaldi said that the amount saved with the initial rate can be thousands of dollars a year, so it makes sense for more expensive homes.

The difference between 3.5% and 5% can be $400 a month.

For a mortgage under $200,000, the savings are less and may not be worth choosing a fixed rate.

Rinaldi said that it was not worth the risk to save $100 a month.