(ARM)- Adjustable Rate Mortgage - Read about the ARMs at A1HomeMortgageInfo.com

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What Is An ARM?
With a fixed-rate mortgage, the interest rate stays the same during the life of the loan. But with an adjustable mortgage rate (ARM), the interest rate changes periodically, usually in relation to an index, and payments may go up or down accordingly.

Lenders generally charge lower initial interest rates for ARMs than for fixed-rate mortgages. This makes the ARM easier on your pocketbook at first than a fixed-rate mortgage for the same amount. It also means that you might qualify for a larger loan because lenders sometimes make this decision on the basis of your current income and the first year's payments. Moreover, your ARM could be less expensive over a long period than a fixed-rate mortgage-for example, if interest rates remain steady or move lower.

Against these advantages, you have to weigh the risk that an increase in interest rates would lead to higher monthly payments in the future. It's a trade-off-you get a lower rate with an ARM in exchange for assuming more risk.

Here are some facts about adjustable rate mortgages:

Interest rate reflects a market index
Lender adds a margin to the index (usually 2 to 4 percent)
Some lenders adjust the rate every year
The shorter the term of the loan the more volatile it becomes
Some lenders adjust the rate only once in the lifetime of the loan (at three (3), five (5), seven (7), or ten (10) years).
Some ARMs have build in caps to help curb the volatility of the loan:

: o Lifetime cap - Limits the interest over the entire lifetime
: o Periodic rate cap - Limits how much payments can increase at one time
: o Payment cap - Limits payments of the lifetime of the loan

Here are some questions you need to consider:

Is my income likely to rise enough to cover higher mortgage payments if interest rates go up?
Will I be taking on other sizable debts, such as a loan for a car or school tuition, in the near future?
How long do I plan to own this home? (If you plan to sell soon, rising interest rates may not pose the problem they do if you plan to own the house for a long time.)
Can my payments increase even if interest rates generally do not increase?

Next: How ARMs Work...

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