By the end of the loan term, however, your loan payments increasingly go towards repaying the loan principal. This is the buildup in homeowners' equity that occurs as ownership in your home gradually shifts from the lender to you. Adjustable-rate mortgages . Early in the ARM's loan term, its rates will almost always be less than that of a fixed-rate loan. Because the borrower agrees to accept the risk of changing rates over the life of the loan, he or she is rewarded with a lower initial rate.
ARMs come in many varieties.
Some adjust their rates every year, while others alter them every three or five years. Loan rates are tied to a number of interest rate indexes. Banks track on a margin, or spread, of two to four percentage points to the underlying index. This is calculated by the Federal Home Loan Bank of San Francisco. Most ARMs offer two built-in caps to protect you from enormous increases in monthly payments.