Adjustable Rate Mortgages (ARMs)

Adjustable rate mortgages shift some of the risk from the lender to the borrower because the loan payments can rise (or fall) when the interest rate terms of the loan change.

Adjustable rate mortgages are very attractive to some consumers, especially in an environment where interest rates are trending downwards. What catches many home buyer's attention is the initial teaser rate that's usually several percentage points below those being offered for fixed loans. The key to understanding this type of loan are the words "adjustable rate" because over time the interest rate, or the terms of the loan will change. This can work both go in your favor...and against you.

Once the initial teaser or adjustment period ends your loan is recalculated based on indices pegged to market conditions and interest rates. If interest rates have fallen you're in good shape. If interest rates go up, your monthly mortgage payment could see a significant increase. For this reason, adjustable rate mortgages are said to shift some of the risk from lenders to home buyers.