Adjustable Rate Mortgages or (ARM's) are loans whose interest rate will vary throughout the loan's term. ARM's  initial rate terms usually range from (3, 5, 7, or 10 years) and sometimes regulate on an annual basis thereafter.  The initial rate on an ARM is usually going to be less than what's offered with a thirty year fixed rate mortgage.  It can be advantageous if you plan only owning your home for up to the time before a possible adjustment takes place or the loan will paid off in a short term.

 

You have to way the risk that an increase in interest rates would lead to higher monthly payments in the future. It's a trade off! You get a lower initial rate with an ARM in exchange for assuming more risk over the long run. Here are some questions you need to consider:

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             Is my income enough or likely to rise enough to cover higher mortgage payments should arise?

             Will I be taking on other sizable debts, such as car or installment loans in the near future?

             How long do I plan to own this home? Do I plan to pay the loan off early?

 

For some ARM's, the initial rate and payment can vary greatly later in the loan term.  Even if interest rate are stable, your rates and payments could change substantially.  When rates change this is the  adjustment period.  The interest rate on an ARM is made up of two parts.  The index and an margin.  The index is a measure of interest rates generally and the margin is an amount the lender sets to your mortgage note. Your payments will be affected by how high or low these caps or limits go with the index at the anniversary date of your rate adjustment.  Leners base rates on a variety of indexes.  Most common indexes are the Constant Maturity Treasury(CMT), securities, the Cost of Funds Index(COFI), and London Interbank Offering Rate(LIBOR).  Some lenders use their own cost of funds index than the indexes previously stated. Information about these indexes are publicly published in newspapers and the internet.