Most ARMs have a period where the rate is fixed. The fixed rate period can be anything from a couple months to 10 years. Most common ARMs are fixed for the first 2, 3, or 5 years.

Most interest only loans are made on an ARM loan. Such as a 3/1 Interest Only ARM. Even though most interest only loans are interest only for the first 5 or 10 years of the loan, this 3/1 I.O. ARM would be fixed for the first 3 years, or for the first 36 months, and then adjust thereafter. Interest only ARM's are a great way to lower your payment and your interest rate.

Rate adjustments are always "capped", or limited by how much they can increase per adjustment period. For example, many ARMs have a " life cap" of 6%, meaning that a start rate of 5% can never adjust to higher than 11%.

Some loans have a "cap" on the payment increases, not the interest rate increases. Option ARMs are a good example of this - generally your payment cannot increase more than 7.5% per year. $1000 per month the first year, $1075 the second year and so on.

All Adjustable Rate Mortgages (ARM) have interest rates that are based on an index and a margin. The index is always some widely published interest gauge, such as the T-bill, LIBOR, COFI, etc. The margin is added to the index to determined the mortgage note rate.

Adjustable rate mortgages are also called variable rate mortgages or hybrid mortgages.

Since the American homeowner usually refinances within 7 years, an ARM is sometimes the best mortgage in which to get started.

All ARM’s are pegged to an index. An index is a guide that banks use to measure interest rate changes. The most common indices used by banks include the London InterBank Offered Rate (LIBOR), 1-, 3-, and 5-year Treasury securities, but there are many others. Each ARM is linked to a specific index.

To figure out the effective rate of interest, one adds to the underlining index the “margin”. The margin can be considered as the bank's markup. It is an interest rate that represents the lender bank's cost of doing business plus the profit they will make on the loan. The margin is added to the index rate to determine the total interest rate. The margin is fixed for the life of the home loan.

The reason borrowers prefer ARM to fixed rate mortgage, where the interest rate remains the same during the life of the loan, is mostly because the initial interest rate for an ARM is often lower than that of a fixed rate mortgage. A lower rate translates into lower payments, which might help borrowers qualify for a larger loan.

ARM’s are ideal for borrowers who intend to move or sell and pay off the mortgage within several years. The possibility of rate increases isn't as much of a factor if the home owner plans to sell the home within a few years.