Some ARMs include a provision for the loan to be converted to a fixed-rate loan within a certain time frame. ARMs were invented to protect lenders against the inherent risk within the interest rate market. Lenders prefer ARMs because there is a built-in cushion against the risk of rising interest rates, one that helps lenders profit in a fluctuating market. It takes a lot of discipline and foresight for a home buyer or someone refinancing to choose a fixed-rate loan over an ARM, simply because fixed rates are initially higher. The operative word is initially.
All ARMs have caps that often exceed the low fixed rates.
For example, you may get a fixed-rate loan at 8.5 percent, or an ARM at 7.75 percent. Obviously, the ARM sounds like a better deal. However, if interest rates go up, the ARM could soar to as much as 12 percent. With a fixed-rate mortgage, your monthly payment and interest rate will never go up. You Really Do Need Title Insurance.