Peer review

Q I hear about using ARMs for mortgages, but what are the risks? What happens if the property depreciates and interest rates go up?

James, Minneapolis

Adjustable-rate mortgages (ARMs) can be a great tool since you can get a rate lower than a fixed-rate mortgage. The downside is the interest rate can fluctuate, just as the name suggests.

Typically, you can get a one-year, 5/1 or 7/1 ARM, meaning the rate would be fixed for the first one, five or seven years. After that the rate, and therefore your payment, can be adjusted up or down every year depending on where interest rates are heading.

Many young people probably won't own their first home or condo longer than five to seven years, so an ARM is a great option. But if you anticipate owning the property for a longer time, a fixed-rate mortgage might be better so that you can lock in your payment and allow for better budgeting.

The housing market has slowed from a few years ago; however, properties have not started to depreciate. If that were to happen, the concern would come if you wanted to sell. First, you could receive less than the amount you originally paid. Second, you want to make sure the value of your home is still higher than your mortgage amount, otherwise the mortgage company could technically require that your loan be paid in full because you do not have the same amount of collateral that was initially pledged. (This is the case no matter what type of mortgage you use.)

Kristin Hannemann, CFP (30)

Clarification

Sharp-eyed readers of last week's tsunami aid question point out that Minnesota taxpayers can deduct a limited amount of charitable donations on their Minnesota return even if they don't itemize.

This is true; here's how it works:

For taxpayers who do not itemize, the first $500 of charitable donations are not deductible on your Minnesota return. However, you may deduct 50 percent of all contributions in excess of $500.

For example, if you made charitable donations of $1,000 in 2004, you may deduct $250 (($1,000-$500)/2).

It's also possible to carryover charitable donations for up to five years.

So if you do not make enough donations in a single year, consider carrying them over to future years when the cumulative total is enough to receive a deduction.

Joe Pitzl (23)