Definition of ARM loan:

A loan that has a fluctuating interest rate and monthly payment. ARMs start off with a fixed interest rate and monthly payment, but then adjust to reflect changes in the market interest rate. A One Year ARM, for example, will have a fixed interest rate for one year and then adjust on the second year, and continue to adjust annually over the life of the loan.

You get a starting interest rate in exchange for taking a risk that rates may rise in the future. There is also a cap on how much the interest rate can rise or fall. Be well-armed before you choose this type of mortgage, calculate if you can afford the highest payment at the maximum interest rate. Other common ARMs are 3/1 5/1 7/1 and 10/1, also known as intermediate ARMs.

Intermediate ARMs are those ARMs with initial adjustments that are longer than one year. Intermediate ARMs give you the benefit of a lower rate than a 30 Year Fixed Rate mortgage and you can generally qualify at the start rate. You also get an extended time frame to the first adjustment, which can be as much as 10 years.

• 3/1 ARMs - have a fixed rate for three years, an adjustment, and then a change in rate annually thereafter.
• 5/1 ARMs - have a fixed rate for five years, an adjustment, and then change annually thereafter.
• 7/1 ARMs - have a fixed rate for seven years, an adjustment, and then change annually thereafter.
• 10/1 ARMs - have a fixed rate for ten years, an adjustment, and then change annually thereafter.