An adjustable rate mortgage [ARM] is a loan where the
interest charged is not constant and changes periodically based on
economic conditions. This is in contrast to a fixed rate mortgage [FRM]
where the interest charged is constant throughout the term of the loan.
The benefit of an ARM is that the interest charged is generally
initially lower than a FRM. This corresponds to a lower monthly payment
and more money in your pocket.

There are multiple factors you
must consider when deciding between an ARM and a FRM. The clear
disadvantage of an ARM is that interest rates will eventually increase,
leading to higher monthly payments. Most of these mortgages have
periodic caps, and all loans since 1987 have overall caps. Periodic
caps set a limit on how much your initial interest can increase by from
one adjustment period to the next adjustment. Overall caps set a
maximum interest increase to prevent lenders from charging extravagant
lending costs. Borrowers who can expect a higher income in the future
can afford the risk of higher interest rates in an ARM.

Furthermore,
if you only plan on living in your house for a few years, it may be
beneficial to get an ARM. This is because it is unlikely the interest
rate will greatly increase in a short period of time and the money you
save from the low interest rate can be invested for the future. Your
lender can provide more information about an ARM and explain any
supplemental fees that may result from initiation or cancellation of
the loan. There are many online calculators that can help you choose
between the two different types of mortgages.