What Is An Adjustable-Rate Mortgage (ARM)?

An ARM is an adjustable mortgage rate. Simply put it is an interest rate on a mortgage that changes from time to time; this also affects whether the monthly payments will go up or down. This differs from a fixed-rate mortgage because in that type of mortgage the interest rate stays the same during the life of the loan.

Lenders generally charge lower initial interest rates for ARMs than for fixed-rate mortgages. This makes the ARM seem cheaper at first than a fixed-rate mortgage for the same amount. This might mean that the borrower can qualify for a greater loan because lenders make this decision based on the basis of the borrower's current income level and the payments for the first year. If interest rates don't change much then an ARM could be less expensive over a longer period of time as opposed to a fixed-rate mortgage. However the borrower does take a certain risk when deciding to go with an ARM because interest rates can increase and lead to higher monthly payments. Generally, ARMs are associated with taking a greater risk.

Here are some questions you need to consider:

• Can my income cover higher mortgage payments if interest rates go up?
• Will I be taking on other sizable debts, such as a loan for a car or school tuition, in the near future?
• How long do I plan to own this home? (If a person plans to sell their house soon then increasing interest rates may not be a big problem in which case going with an ARM might be the better choice).
• Can my payments increase even if interest rates generally do not increase? If so, do I have the funds to pay for higher monthly payments?