Loan Options - Adjustable Rate Loans

An adjustable rate mortgage (ARM) is a home loan program with an interest rate that adjusts periodically to reflect changes in a specified financial index. Such an index could be the one-year Treasury, the Cost of Funds Index (COFI), the LIBOR (London Interbank Offered Rate) or other popular indexes. ARMs may adjust every six months or once a year and most ARM programs include caps that protect your monthly payment from increasing too much, as well as a lifetime cap, a rate that your ARM will never exceed over the life of the loan.

Advantages

Adjustable rate mortgages (ARMs) generally have the lowest initial interest rates meaning a lower monthly payment. This initial rate is fixed for a defined period of time and usually corresponds to the name of the product. For example, a "5 Year ARM" would mean the initial rate is fixed for the first five years.
The most popular advantage behind ARM loans is the borrower tends to qualify for a larger loan amount than they would applying for a traditional 30 year fixed rate. ARMs are generally recommended for homeowners who plan to keep the loan for a short time and are confident their income will remain the same or grow during the life of the loan.

Dis-Advantages

The traditional ARM mortgage (one that does not include minimum payments or negative amortization) carries very little unknown risk at the time of origination.
The biggest risk for any homeowner is simply assessing the amount of savings over a fixed rate and understanding your comfort level with possibly being exposed to much higher interest rates should you be forced to keep the property longer than expected. Remember, it's not just a matter of where rates are in 5 or 10 years - it's also a question of whether you not will still be eligible for the same type of mortgage.