Adjustable-rate Mortgage (ARM)

Adjustable-rate mortgages (ARMs) have interest rates that change over time. Usually, you get a lower, fixed introductory rate for a set period. After this period, the rate changes, either up or down, at predetermined intervals for the remainder of the loan term. A 5/1 ARM, for example, has a fixed rate for the first five years; the rate then increases or decreases based on economic conditions each year until you pay it off. Your monthly mortgage payment will change also, depending on the change in rate.

Pros

• Lower introductory rates
• Could pay less over time if prevailing interest rates fall

Cons

• Ongoing risk of higher monthly payments
• Tougher to plan your budget as rates change

If you don’t plan to stay in your home beyond a few years, an ARM could help you save on interest payments. However, it’s important to be comfortable with a certain level of risk that your payments might increase while you’re still in the home.