An adjustable rate mortgage (ARM) is a mortgage loan that offers a lower initial interest rate. The period of the lower interest will end, and then the mortgage company can raise your rates according to market indexes.
Adjustable rate mortgages were designed to protect the banks. Banks can lose money if they loan money at a lower interest rate, and then because the market changes pay higher interest rates on savings accounts. This allows the bank to adjust the interest rate so that they do not take a loss on the current markets. They make the adjustable rates more appealing, by offering a lower initial rate.
If you decide to get an adjustable rate mortgage you should carefully pay attention to the caps. Once the initial rate expires the caps set limits regarding your rate increases. A cap may limit the amount your bank can increase the rate each year. Another cap may limit the number of times a year your interest rate can be raised.
If you qualify for a traditional mortgage, you are much safer locking in that interest rate. While it may initially be higher, over the life of the loan it will be lower. Although you may only be planning on staying in the house for a few years, you may find that you end up settling there, and it is safer to get a traditional mortgage. If you are planning to refinance out of the ARM later, you may discover that the market has not met your expectations.
