A January 2006 study by the Federal Reserve said that 35 percent of people with ARMs didn't know when their rates would reset or the potential maximum they might pay on those loans.

For some people who last refinanced one, two, or three years before — particularly those who went with interest-only loans — an increase based on current rates could raise the size of the payment as much as 60 percent.

Don't want to get caught with a rate-adjustment nightmare? It may happen, but at least you can prepare. Keep these questions in mind:

• Do you know whether you have an ARM?

  You'd be surprised at the number of people who don't even know. If you're not sure, check.

• When's your adjustment, or reset, period?

  This is the period between one rate change and the next. A loan with an adjustment period of one year is called a one-year ARM, and the interest rate can change once every year. You need to ask your lender how much warning you'll get about an approaching adjustment period and how your current payments may be affected.

• Did you get an introductory rate with your loan?

  During the height of the mortgage boom, lenders took a cue from credit card companies by offering customers a teaser rate during the first year of the ARM. When that rate goes off, it's quite a shock. Realize that you'll have to adjust to the possibility of significantly higher payments later on, especially if interest rates keep heading up. Make sure you understand the relationship of any introductory rate to a permanent rate.

• What's the cap?

  On most conventional ARMs, the lender caps the percentage increase in the interest rate as well as the dollar amount a borrower will pay. It's very important to ask your lender about how your rate cap works on your particular loan. Ask whether there are any other conditions under which your monthly payment might change.

What's payment shock?

Payment shock is an industry term that describes the severe upward movement of mortgage loan interest rates and its effect on borrowers. This is the major risk of an ARM. Always know when your loan rate resets.

• Are there restrictions on prepayment or conversion?

  For borrowers with lower credit scores or those who had to go to subprime lenders, there may be interesting language in your loan agreement restricting prepayment or converting your loan to a fixed-rate product whenever you want.

Keep in mind that if you are in subprime loan territory or getting an ARM with a drastically low teaser rate or other big incentive to get you in the door, your caps might be very wide. That means that when your rate or payments adjust, you can get clobbered. Understand the caps you're going to be offered on the loan and how they compare to competing bids from other lenders.