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Adjustable Rate Mortgages (ARMs) Adjustable-rate mortgages (referred to as ARMs), become more popular as interest rates rise because they offer a rate below 30-year fixed rates. ARMs make sense for borrowers who plan to be in a home only a short time or who expect income to rise over the next few years. And the lower rate allows borrowers to purchase more house than they could with a fixed-rate loan. Here are some things to be aware of when shopping for an ARM:
The adjustment schedule--can be every year, or every two, three, or five years.
The index--is the financial information on which a rate change is based. Most lenders use either the U.S. Treasury bill index or a cost-of-funds index.
The margin--refers to how much the lender marks up the index to set your new interest rate. And the caps--the limits for rate hikes in any adjustment period and over the life of the mortgage.
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