What is an adjustable rate mortgage?

An adjustable rate mortgage, or ARM, is a loan type that offers a lower initial interest rate than most fixed rate loans. The trade off is that the interest rate can change periodically, usually in relation to an index, and the monthly payment will go up or down accordingly. Against the advantage of the lower payment at the beginning of the loan, you should weigh the risk that an increase in interest rates would lead to higher monthly payments in the future. It’s a trade-off. You get a lower rate with an ARM in exchange for assuming more risk. For many people in a variety of situations, an ARM can be the right mortgage choice, particularly if your income is likely to increase in the future or if you only plan on being in the home for three to five years.