Adjustable Rates are a form of mortgage where the interest rate you pay changes over the life of your loan. The way adjustable rates work is as follows: the mortgage starts off with a fixed rate, typically 3, 5 or 7 years, but it will vary depending on the mortgage lender.
At the end of the "ARM" end of the mortgage, the mortgage will have adjustable rates meaning the rate will change based on a formula determined at the time of the loan - typically the adjustable rates are calculated by adding a percentage to the prime rate.
Some mortgage companies offer adjustable rates with a cap - meaning your rate will not exceed a certain point. You will want to find out if there are caps to the adjustable rates being offered. Keep in mind, of course, you can refinance adjustable rates mortgages and make them fixed rate.
Mortgages with adjustable rates generally start off with a lower introductory rate than is being offered for 30-year fixed rate loans. This helps some people afford the house in the early years, which is helpful for those people who expect an increase in income during the adjustable rates period.
It is always a good idea to weight the pros and cons of adjustable rates mortgages and fixed rate mortgages before determining which is best for you. A lender will also be able to show you the difference in repayment of the two types of loans in order to assist you in determining if your want your mortgage to have adjustable rates.
