A variable or adjustable rate mortgage (ARM) is a loan that often has lower interest rates, but the rate of interest that you pay can change over time.
Unlike a fixed mortgage rate, an ARM interest rate generally starts out low and then can be modified over time. In most cases, this doesn't happen any more than once per year.
ARM loans are a perfect kind of loan to pick up in good economic times when interest rates are low and steady. However, if taken over a long period of time and economic conditions change, you could see your monthly loan payments go much higher than you had anticipated they would.
ARM interest rates and how they go up are specified in your loan agreement and you must be sure that you understand everything before you sign. At minimum, there should be a basis defined for how your loan interest rates are calculated. Loan interest rates that are based on the prime interest rate or some other rate that the bank does not control is the proper way to determine the effective interest rate on your ARM. If not, you may find that the bank can increase your interest rates as they see fit, and you can be sure they will.
You should also make sure that there is a cap on the amount that they can go up in any given year and a cap on how much they can go up over the term of the note. By doing this, you will make sure that you are not horrified at seeing your interest rates skyrocket and your payments go from low to high all at once.
An additional good part of an ARM is that if the interest rate is tied to something like prime interest rate, as this goes down, so does your payment and without having to refinance or renegotiate the loan.
