American Fidelity Mortgage Services, Inc.

Adjustable rate loans are those loans where the initial interest rates are fixed for a short period of time. These loans usually have lower start rates than those of fixed rates and balloon mortgages. The lower start rate allows consumers to accomplish different things. It usually allows the consumers to qualify for more loan, and to have lower monthly payments for the first years they own the home. Adjustable rates mortgages offer fixed terms usually of 1,2,3,5,7,10 years. For example a 5 year arm would be fixed for five years before the interest rate can adjust. A 3 year arm is fixed for three years before the interest rate can adjust. Some important factors to be aware of when choosing an adjustable rate mortgage are the following:

Adjustment Period; is the period until which the interest rate can adjust. (1,2,3,5,7,10)
Caps; limit the amount which the interest rate can adjust per year after its initial term. The most common caps are 2/6. The interest rate could adjust 2 percent per year but not more than 6 percent over the life of the loan.
Index & Margin; are the factors that decide what the interest rate will adjust to. The margin is a constant that will never change. The margin is added to the index. The index is an economic indicator that can go up or down. This index generally follows the market. Commonly used are the 1 year T-bill, LIBOR, and the cost of funds indices.
Convertibility. Point at which loan can be converted to fixed rate.

Although, adjustable rate mortgages are very beneficial and can save consumers thousands of dollars, the most important thing is to understand your adjustable and how it works.