Adjustable rate mortgages can save borrowers a lot of money in short and medium term interest rates. But if you are holding one when it is time for the interest rate to reset, you may face a much higher monthly mortgage account. That is fine if you can afford it, but if you are like the vast majority of Americans, an increase in the amount you pay each month is going to be difficult to swallow. Consider this: the adjustable rate mortgage adjustment during the financial crisis was partly the reason why many people were forced into foreclosure or to sell their home in short sales. Post the merger of housing, a lot of financial planners place adjustable rate mortgages in the risk category. While the ARM has gotten a bum rap, it is not a bad mortgage product in itself,

Changes in the interest rate with an ARM
In order to get an understanding of what is in store for you with an adjustable rate mortgage or ARM, you first have to understand how the product works. (See also: "Mortgages: Fixed rate versus adjustable rate.") With an adjustable rate mortgage, borrowers lock in an interest rate, usually a low one, over a certain period of time; Subsequently, when that period of time has expired, the mortgage interest rate is restored to whatever the prevailing interest rate is. Variable rate mortgages generally vary in lengths from one month to five years or more. For some of the ARM products, the initial rate that a borrower pays and the amount of the payment can change substantially compared to what is paid later on in the loan. Because the low initial interest rate may be attractive to borrowers, particularly those who do not plan to stay in their homes for a long time or are sufficiently informed to refinance if interest rates rise. In recent years, with interest rates fluctuating at record lows, borrowers who had an adjustable or adjustable rate mortgage reset saw no big jump in their monthly payments. (See also: "Top 6 Mortgage Mistakes.") But that could change if the Federal Reserve moves to raise rates next year.


Know Your Adjustment Period In order to determine if an adjustable rate mortgage or ARM is a good fit, borrowers need to understand what the adjustment period is and what it means for their particular loans. In essence, the adjustment period is the period between changes in interest rates. Let's say the adjustable rate mortgage has a one-year adjustment period. The mortgage product would be called a 1 year ARM, and the interest rate and therefore the monthly mortgage payment would change once every year. If the adjustment period is three years then a 3-year ARM is called, and the rate will change every three years. There are some hybrid products out there like the ARM 5/1 year which gives you a fixed rate for the first five years and then the interest rates are adjusted once a year for each year after that