An ARM is a mortgage with an interest rate that may vary over the term of the loan -- usually in response to changes in the prime rate or Treasury Bill rate. The purpose of the interest rate adjustment is primarily to bring the interest rate on the mortgage in line with market rates.
Mortgage holders are protected by a ceiling, or maximum interest rate, which can be reset annually. ARMs typically begin with more attractive rates than fixed rate mortgages -- compensating the borrower for the risk of future interest rate fluctuations.
The most common Arms are the 5 year arm or the 7 yr arm.
Choosing an ARM is a good idea when:
Interest rates are going down
You intend to keep your home less than 5 years
You are strapped financially in your current payment and need immediate relief.
