The Federal Reserve Bank has jumped into the mortgage market with both feet as it attempts to revive a critically ill housing market. This is good news, but also presents a trap for the unwary.

The Federal Reserve Bank is touted with many functions, but it has one primary overall duty. It is supposed to keep the economy from getting to high or low. Obviously, it appears to have failed in this endeavor during the final months of Greenspan’s reign.

The good news is the Federal Reserve Bank is being hyper aggressive in combating the current downturn in the economy and real estate market. Whether you are considering buying or selling a home, it is important to note that the economy and real estate market are tied together. If you fail to recognize this, you could walk into a mortgage loan trap.

What is the first question anyone has when applying for a mortgage? Should I go with an adjustable rate mortgage or a fixed rate mortgage? The fixed is often very attractive because it offers low payment terms up front, in exchange for giving the lender the ability to raise rates of its cost to borrow money goes up. A fixed rate mortgage, on the other hand, starts out with a bit higher payment, but gives you a steady figure throughout the loan regardless of what happens to interest rates.

The current mortgage market creates a classic trap for borrowers. Money is cheap, cheap, cheap as the Fed tries to revive the financial markets. This has raised another problem, however. The cheap borrowing rates have devalued the dollar. If you are trying to book a trip abroad for the summer, you already know this.

For all intensive purposes, the dollar has crashed. It has just done it at a gradual pace, so most people haven’t noticed. The condition of the dollar is going to lead to inflation sooner or later. It is also going to lead to investors selling off their dollars to invest in oil, Euros or some other investment that has a better return. As you’ve noticed at the gas station, fuel prices are already heading north as oil prices hit historic highs.

So, what is the trap? Well, the Federal Reserve Bank has had to pick its poison when it comes to the financial situation. It can either try to revive the dollar by raising rates or help the economy by cutting them. It is the proverbial catch-22 if you will. Obviously, the Fed has decided to focus on the economy and rightly so. You should expect, however, that the Fed will raise the rates as soon as it can to try to revive the dollar. And here is the trap.

When applying for a loan, you might be tempted by the incredibly low rates on some form of adjustable rate mortgage. The problem is such rates are ADJUSTABLE. While payments might be low now, they are going to be going up dramatically. Why? Because the Fed is going to have to step in at some point to try to help the dollar and that means raising interest rates. If you aren’t ready for those rate increases, you could end up in a very bad financial situation.

Raynor James writes about issues surrounding mortgage loans for FSBOAmerica.org.