An "ARM" means Adjustable Rate Mortgage.  Contrary to what you may have heard in the media, ARMs are not subprime mortgages.  The term "subprime" is given to mortgages designed for borrowers with less than average qualifications, such as credit, income, debts and assets.  Many subprime mortgages were ARMs, but most were not.  ARMs are popular due to the typically low interest rates they carry.  Depending on a borrower's goals, an ARM could give a borrower significant payment and interest savings over a certain period of time. 

Americans refinance every 4 years on average.  In this type of loan, the interest rate varies periodically.  Monthly payments increase or decrease with the interest rate.  Borrowers should be careful when selecting this type of loan, as market conditions can negatively impact rates.  The most common of all ARMs is the hybrid ARM, sometimes called an option-rate loan.  The term "hybrid" refers to the mortgage's blend of both fixed and adjustable rates.  Hybrid ARMs are fixed for a specified period (determined by the borrower, usually 3, 5, 7 or 10 years) and then can adjust at a designated time or date.  The date is known as the reset date. 

After the reset date, an ARM can adjust up or down, depending on market conditions.  ARMs do have interest rate caps which limits the amount and how often the rate can change.  One cap is how much the rate can change at the reset date.  Another cap is how often the rate can change, say, every 6 months or 1 year.  Yet another cap is how much, in total, the ARM rate could change over the life of the loan.

Contrast this with a fixed rate mortgage loan in which the interest rate is consistent during the life of the loan.  This type loan is attractive since you will know how much your house payment will be for as long as you have the loan.  The only variable can be taxes and insurance if they are included in the loan payment.  The downfall is that if you lock in at a higher interest rate, it won’t change even if interest rates fall during the life of your loan.  Your only option would be to refinance if rates decreased enough to make it worthwhile.

The majority of homeowners choose a 30-year fixed rate loan.  While It takes a while to build equity, you can use the house as your primary residence for several years, knowing you have a stable rate.  Another popular mortgage is the 15-year fixed rate loan which lets you pay off your loan quicker and allows you build equity sooner.  The rate is lower, but the payment will be higher than a 30-year loan. 
 
 

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