There are many Adjustable Rate Mortgage products available today. Some ARM products have rates that adjust immediately the following month after settlement, others have an initial fixed rate period of 1, 3, 5, 7, or 10 year. ARMs that have an initial fixed interest rate period are also known as Hybrid Loans.

When choosing an ARM product, it is as important to consider the underlying indices and margins as picking the lowest teaser rates. Different indices have different sensitivity to the interest market. In other words, some indices such as Treasury bills and LIBOR are highly sensitive to market conditions and adjust rapidly. The 11th District Cost of Funds Index, also known as COFI, tends to move slower in comparison and therefore less volatile.

ARM products almost always have an initial interest rate that is lower than that of fixed rate products of the same loan term. These lower starting rates, also refered to as Teaser Rates, are meant to induce/reward borrowers who are willing to bear some of the risks of future interest rate movements.

ARM's are great for keeping your payment down for a fixed period of time while you work on your FICO score and aim for a better fixed rate down the road. Some ARM loans have an interest only option. These loans are very popular with people who do not plan on staying in the home for a long period, for people who want to qualify for a larger home and they are great for particular kinds of investment properties to increase cash flow due to the lower payments.

The ARM rate quoted by a lender or broker is the initial rate. It holds until the end of the fixed-rate period, which can last from a month to 10 years. This rate is critically important if the initial rate period lasts for 10 years, but it is very unimportant if the period is only one month. On the most popular ARM program, the initial rate period is 12 months, and on more than half the period is 36 months or less. While you can always opt for an ARM with a longer initial rate period, the rate goes up as the period lengthens. If you need the rate on a one-year ARM to qualify, you must consider very carefully what happens after the fixed-rate period ends.

ARMS have caps so the borrower is protected by a maximum adjustment the lender can make over the term of the loan. This information should be clearly identified in the Truth in Lending statement (TIL) which should be given with the Good Faith Estimate (GFE). What's nice about ARM loans is it allows the borrower to have a lower payment initially. These type programs can be used for many reasons, one of them being for someone who won't be living in a property for an extended period of time.

"American consumers might benefit if lenders provided greater mortgage-product alternatives to the traditional fixed-rate mortgage,...To the degree that households are driven by fears of payment shocks, but are willing to manage their own interest-rate risks, the traditional fixed-rate mortgage may be an expensive method of financing a home."

If one or more of these situations describes you, an ARM might be a good fit:
-You plan to stay in your home for a relatively short period of time
-You want lower initial monthly payments and can handle potential payment increases in the future
-You want to qualify for a larger mortgage amount, and you expect your income to go up over time

It has been shown, that home owners would have saved thousands of dollars if they had a ARM over a conventional 30 year fixed. If you plan to move in the next 3 years the best financial choice would to get a 3 year or possibly a 5 year ARM. When a 30 year fixed mortgage is around 5.875% a 5 year ARM is around 5.25% and a 3 year ARM would be about 5.00%. On a $200,000 loan the monthly payments would be $1183 for a 30 year, $1104 for a 5 year ARM, and $1073 for a 3 year ARM. Times that by 3 years, 36 months, and your savings for an ARM vs. a 30 year fixed would be between $2800 - $3900. Money better spent elsewhere.

Is the ARM right for you? The only way to be sure is to compare it with fixed rate programs for the length of time you are going be in the property. You will be able to see the difference in the amount of savings over this duration.