Adjustable-Rate Mortgage (ARM)

The interest rate on an ARM can change over its lifetime. What you should consider as you research ARMs is how and when the rate changes. Those factors will affect how much your monthly payment is.

ARMs start out like fixed-rate mortgages. They have an initial period in which the interest rate and your monthly payment remain the same. The initial period can vary from several months to several years. After that, the rate and your monthly payment can go up or down for the remainder of the term. In general, ARMs come in terms of 15 to 30 years.

The rate you pay on an ARM is based on a fluctuating index plus a fixed extra amount, called a margin. Keep in mind that different indexes go up and down faster than others and both the index used and the margin can vary among lenders.

Some other important questions to ask:

  * Does the ARM you're considering include a rate cap? Rate caps limit the size of interest rate changes both for periodic adjustments and for the life of the loan.
  * How often does the rate change? Some ARMs may adjust annually, but some may adjust more frequently.
  * Are there any penalties for paying off your loan early, also called a prepayment fee? Being able to prepay your ARM will allow you to refinance if rates go down.