What is an Adjustable Rate Mortgage?

An adjustable rate mortgage is a type of loan where the interest rate and the monthly payments vary over time. The rates are adjustable usually starting out with the lowest interest rates up front and the highest rates coming later on in the life of the loan. The interest rates are increased according to a predetermined schedule. Usually, you can expect increases every 6 months to a year.

Low starting rates
The big advantage that an adjustable rate mortgage (ARM) offers is the low initial payments. If your lender cannot qualify you for a fixed rate mortgage, you can probably get an adjustable rate mortgage instead. Of course, make sure that you can afford payments at the high end as well as the low end of the interest scale.

Always available
Another big advantage of an adjustable rate mortgage is that they are always available. If interest rates are incredibly high, you can get an ARM quoted at a much lower rate, because the lender will still make a lot of money over the life of your loan.

Check monthly payment at all interest rate levels so you don't experience sticker shock
The rate you are quoted up front and that is calculated for the first couple of payments is usually a teaser rate. Get a quote for what your monthly payment will look like when you are paying the lowest interest rates around, and what your monthly payments will look like when you are paying the highest interest payments. You can get an adjustable rate mortgage quote from almost every lender on the market.

Ask lots of questions and get lots of figures written down on paper so you won't be surprised as the rates fluctuate. Also, there's usually a built in cap. The highest possible rate is quoted in the contract and can still end up being lower than the market index.