Adjustable Rate Mortgage (ARM)

An Adjustable Rate Mortgage, or ARM is exactly what it sounds like. The interest rates on this type of mortgage is recalculated periodically to more closely match current market rates. ARMs were very popular a few years ago when mortgage rates were uncomfortably high, but in today's market are not as common.

The draw of ARMs today is in their initially low interest rates. Adjustable Rate Mortgages tend to start out appreciably lower than Fixed Rate Mortgages, which makes it possible for many people to afford a larger home than they could with a FRM.

If you're considering any type of ARM in today's market, you should be extremely cautious. First of all, mortgage rates are still at an all-time low. If you're planning on keeping your house for more than a few years, you may find yourself in a pickle when rates begin to rise again. As rates rise, so will your payments - usually. If you're looking at an ARM with fixed or capped payments, be very careful that you won't run into a negative amortization scenario.

Adjustable rate mortgages can be very beneficial if chosen wisely and prudently. The sad truth is that most home buyers do not do so. There are many sad tales of home buyers who have had the house of their dreams turn into a nightmare because they overextended themselves and got trapped. Don't let it happen to you - if you are considering an ARM, make sure you have a clearly defined, long-term plan that you have reviewed with your financial advisor.