An ARM is an adjustable rate mortgage. An adjustable rate mortgage is a mortgage where the interest rate is fixed for a set of amount of time. This can range from one month to ten years. The payments are set over a fixed term (typically a 15 or 30 year term) but because the interest rate fluctuates, so does the payment. The adjustable rate mortgage has set caps. There are typically two caps. The first cap prevents the interest rate moving up or down by the too much the interest rate moves . The second cap is the lifetime cap which means the interest rate cannot ever exceed the amount of the lifetime cap.

For example, on a 5/1 Conventional ARM, the caps are 2 and 6.

Let's say the interest rate on a 5/1 ARM 3%. Because the ARM in this case is a 5/1 ARM, the interest rate is fixed for five years. After the five year period, the interest rate begins to adjust one time per year. If the interest rate is substantially higher when the rate begins to adjust, then the rate will not increase by more than 2% so in this case, the interest rate will not be greater than 5% at the first adjustment period. It would take 3 consecutive years of increase for the rate to increase by the total cap. Because the lifetime cap is 6%, then the maximum interest rate on this loan would be 9%.

It could take three years or several years for the interest rate to reach it's peak on the adjustable rate mortgage because the adjustments are based on market conditions. If the market is lower, then the interest rate could decrease or stay the same.

Adjustable rate mortgages are a great alternative for consumers who need temporary money but they are not the best option for long term buyers and should never be utilized to afford a payment that would not otherwise be affordable.

If you choose an adjustable rate mortgage, be very vigilant to read all the terms regarding the adjustable rate mortgage. Make sure you take time to read all of the terms and understand exactly how the adjustable rate mortgage performs.

For example, on a 5/1 Conventional ARM, the caps are 2 and 6.

Let's say the interest rate on a 5/1 ARM 3%. Because the ARM in this case is a 5/1 ARM, the interest rate is fixed for five years. After the five year period, the interest rate begins to adjust one time per year. If the interest rate is substantially higher when the rate begins to adjust, then the rate will not increase by more than 2% so in this case, the interest rate will not be greater than 5% at the first adjustment period. It would take 3 consecutive years of increase for the rate to increase by the total cap. Because the lifetime cap is 6%, then the maximum interest rate on this loan would be 9%.

It could take three years or several years for the interest rate to reach it's peak on the adjustable rate mortgage because the adjustments are based on market conditions. If the market is lower, then the interest rate could decrease or stay the same.

Adjustable rate mortgages are a great alternative for consumers who need temporary money but they are not the best option for long term buyers and should never be utilized to afford a payment that would not otherwise be affordable.

If you choose an adjustable rate mortgage, be very vigilant to read all the terms regarding the adjustable rate mortgage. Make sure you take time to read all of the terms and understand exactly how the adjustable rate mortgage performs.