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. However, some ARMs have more frequent interest and payment changes. The period between one rate change and the next is called the adjustment period. So, a loan with an adjustment period of one year is called a one-year ARM, and the interest rate can change once every year.
Many ARMs offer an initial adjustment that is longer than the future adjustments.
The Index Most lenders tie ARM interest rate changes to changes in an index rate. These indexes usually go up and down with the general movement of interest rates. If the index rate moves up so does your mortgage rate in most circumstances, and you will probable have to make a higher monthly payment. On the other hand, if the index rate goes down your monthly payment may decrease. Lenders base ARM rates on a variety of indexes.