ARM is an acronym for adjustable rate mortgage. ARMs are mortgage that are tied to a certain index, and will adjust at different periods based on certain economic factors.

Most ARMs have a period where the rate is fixed. The fixed rate period can be anything from a couple months to 10 years. Most common ARMs are fixed for the first 2, 3, or 5 years.

Most interest only loans are made on an ARM loan. Such as a 3/1 interest only ARM. Even though most interest only loans are interest only for the first 5 or 10 years of the loan, this 3/1 I.O. ARM would be fixed for the first 3 years, or for the first 36 months, and then adjust thereafter. interest only ARM's are a great way to lower your payment and your interest rate.

Rate adjustments are always "capped", or limited by how much they can increase per adjustment period. For example, many ARMs have a " life cap" of 6%, meaning that a start rate of 5% can never adjust to higher than 11%.

Some loans have a "cap" on the payment increases, not the interest rate increases. Option ARMs are a good example of this - generally your payment cannot increase more than 7.5% per year. $1000 per month the first year, $1075 the second year and so on.

All Adjustable Rate Mortgages (ARM) have interest rates that are based on an index and a margin. The index is always some widely published interest gauge, such as the T-bill, LIBOR,< a href="cofi">cofi , etc. The margin is added to the index to determined the mortgage note rate.

Adjustable rate mortgages are also called variable rate mortgages or hybrid mortgages.

Since the American homeowner usually refinances within 7 years, an ARM is sometimes the best mortgage in which to get started.