You need to consider the maximum amount your monthly payment could increase and to understand how and why the payment could increase. Federal Law requires all lenders to provide you with a full written disclosure that explains exactly how their ARM loan works and historical data about interest rate adjustments. Before you apply for an ARM loan, ask the lender to provide you with a copy of their ARM Loan Disclosure. With a fixed-rate mortgage, the interest rate stays the same during the life of the loan. But with an ARM, the interest rate changes periodically, usually in relation to an index, and payments will go up or down accordingly.
Lenders generally charge lower initial interest rates for ARMs than for fixed-rate mortgages.
This makes the ARM easier on your pocketbook at first than a fixed-rate mortgage for the same amount. It also means that you might qualify for a larger loan because lenders sometimes make this decision on the basis of your current income and the first year's payments. Against these advantages, you have to weigh the risk that an increase in interest rates would lead to higher monthly payments in the future. For many people in a variety of situations, an ARM is the right mortgage choice, particularly if you income is likely to increase in the future or if you don't plan on being in the home for more than 3 to 5 years. The Adjustment Period With most ARMs, the interest rate and monthly payment change every year, every three years, or every five years.