There are advantages of financing your home with an Adjustable Rate Mortgage. The initial interest rate on these loans are typically lower than a fixed rate mortgage. That means your monthly payments are also lower. The lower you monthly payments are, makes it easier to get approved for the Adjustable Rate Mortgage. And, typically you can borrower higher amounts. This may be good news if you are trying to buy a home for the first time, refinancing you current mortgage, if you are moving up to a more expensive home, or if you are planning on making an investment for which you need cash now.

However there are disadvantages of financing your home with an Adjustable Rate Mortgage. The lower interest rates and lower payments can change. Each Adjustable Rate Mortgage includes an agreement that says your lender can adjust the rate at a specific time. This is called an adjustment period. Adjustment periods for ARM loans can range from 1 month to several years depending on the lender. As a general rule, the shorter the adjustment period, the lower the initial interest rate offered. For example a 1 month Adjustable Rate Mortgage often comes with a lower initial interest rate than a 6 month or 1 year Adjustable Rate Mortgage.

How much change should you expect? As interest rates in the economy change, your Adjustable Rate Mortgage changes also. To determine the amount of change, lenders base your new rate on an interest rate index which is published and not controlled by the lender, plus a small margin. Interest rate changes are great news if interest rates go down. The majority of Adjustable Rate Mortgages have rate caps. Adjustable Rate Mortgages without a cap are not a good idea. If your lender offers no rate cap, look for another lender.