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Any mortgage where the interest rate changes at predetermined intervals is known as an adjustable rate mortgage, or ARM. This gives the lender the opportunity to adjust the interest rate so that it is closer to the current interest rates. Here are a few key things you should know about ARMs before you get one. 

ARMs Have Introductory Rates

What makes an adjustable rate mortgage unique is that they usually have some sort of introductory rate that is going to be better than the current interest rates. This rate is often considered as a teaser rate, and can be what attracts many home buyers to using an adjustable rate mortgage. Expect it to be lower than if you were to get a 30 year fixed rate mortgage, and can make an ARM a great option for those that plan on not being in their home very long.

ARMs Have Defined Adjustment Intervals

One thing that is very different between ARMs is what is known as the adjustment intervals. These adjustment intervals can be different depending on the type of loan you get, which could be monthly, quarterly, semi-annually, yearly, or some other predefined interval. In general, a loan that has more frequent adjustment intervals is said to favor the lender, since rates will be closer to the current interest rates for new lenders. A longer interval can favor the borrower, since they'll be protected from rate increases until the next adjustment interval. 

ARMs Have A Payment Cap

There are measures in place to ensure that a borrower is not shocked by a particularly large increase in their interest rate. This is known as a payment cap, and it limits how much an interest rate can go up during the reset period at each adjustment interval. This is designed to benefit the borrower since they will always have an expectation that their loan can increase no higher than a specific amount at the next adjustment interval.

ARMs Have Interest Rate Ceilings And Floors

In addition to the payment cap, there is also an interest rate ceiling. This defines the maximum interest rate that an ARM is allowed to go up to. This can give peace of mind to a borrower, since they'll know the absolute maximum that their monthly payment could be when using an ARM. However, there is also an interest rate floor that protects the lender from offering a loan that is so low that they are not making money from it. 

If you are currently shopping around for home loans, make sure you understand the different types to help you in the long run.