Adjustable-Rate Mortgage

With an adjustable-rate mortage (ARM), the interest rate fluctuates up and down according to the level of current market interest rates within limits at specific intervals.  From a lender's point of view, ARM's are preferable because they allow for a matching between the rate that the lender pays on savings accounts to fund the loan and the income from the loan.  What makes ARM's appealing to borrowers is that lenders generally charge a lower rate of interest on ARM's. An ARM loan fluctuates, or is adjusted, at set intervals and only within set limits.

The adjustment interval tells how frequenly the rate on the ARM will be reset.  The ranges of these intervals are as low as three months to as long as 7 years.  If an adjustment rate on the ARM is reset at an interval of five years, the rate on the arm is reset to the index rate plus the margin.  Volatility on mortgage payments tend to increase when the adjustment period is shorter. You may want to consider a longer adjustment period when considering an ARM loan.