An ARM is an acronym for ADJUSTABLE RATE MORTGAGE. As the name suggests, it is a mortgage that allows for periodic adjustments in the interest rate. This rate change usually has a direct relationship to a banking or business index. The payments may fluctuate up or down as that index changes. Most of the time these ARM maintain an interest rate for a stated period of time.
They are not free floating, therefore, to every wind and tide of the index. However, periodically at a prescribed date they check into that index to affix a new interest rate.

Lenders use the ARM to attract borrowers with lower initial interest rates than standard fixed rate mortgages. This benefits buyers with less than perfect credit to buy a home or refinance an existing mortgage at a lower rate than they could get from a fixed mortgage. It may allow them to actually buy a better home than their credit would allow with a fixed mortgage. Most credit problems can be remedied harmless after two years, at which time they could refinance their home again at hopefully a lower interest rate. Of course, the benefit to the lender is that they know most borrowers tend to stay with a mortgage even when the interest rate rises. Most borrowers believe that since their interest has gone up all interest rates are rising at the same rate. They do not try to change, figuring it just is not worth it. That is where they are often wrong. More than likely their credit scores are better than before. Even the purchase of a new home or consolidation of their bills will improve their credit rating. They have probably also changed their bill paying habits as well.
This all helped their credit scores. Their entire credit outlook may have totally changed. Moreover ARMs, at times, prove to be less expensive over a long period of time than fixed rate mortgages.
For example this would be so if interest rates were steady or falling. The only real problem with ARMs are the threats of higher interest rates. At the time of indexing an index may force the interest rate higher. This will be reflected in higher interest rates to the borrower together with higher monthly payments. This is the trade off: you get a lower initial rate with an ARM, but you assume greater risk than a fixed rate mortgage.

The Federal Government has installed an industry-wide Disclosure System to protect the consumer. This system alleviates most of the problems by fully disclosing important information to the borrower in nearly all cases. It lets the borrower know the maximum margin of increase that may be added at the time of each indexing. This system also applies a CAP to that margin over the life of the mortgage.

Before you decide on an ARM you need to consider the following criteria:

*Will my income likely increase? Will it rise enough to cover the possible higher interest rates and monthly payments?
*Will I be having additional debts I do not have now in the near future? (examples: new car, school loans, home repairs, medical payments and etc.)
*How long do I plan to own this home? If you plan to sell soon, the threat of rising interest rate will not matter.
*Will the amount I pay for this loan be worth it?
*Is it apparent that interest rates will climb or fall?

After you have decided these questions you will know better as to whether or not ARM are best for you. Talk to a qualified Mortgage Broker for more information.

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