Adjustable Rate Mortgages often offer a lower interest rate than a fixed rate mortgage, but the rate changes over time based on various market indices. An ARM is a good choice if you expect your income to increase over time or if rates are expected to drop. It is also a good choice if you know that you will be selling your home in a relatively short time period.

ARMs usually start with a lower interest rate than a fixed-rate mortgage, so your monthly payments are lower. This allows you to qualify for a larger mortgage than would be possible with a fixed-rate mortgage or a mortgage loan in the same amount but with lower monthly payments. The interest rate on an ARM is adjusted periodically based on an index that reflects changing market interest rates. When the interest rate is adjusted, your monthly payment goes up or down. It's important to understand all the aspects of ARMs before you make your decision.

Advantages

• When interest rates go down, payment goes down
• Initial interest rate can be as much as 2 to 3 percent lower than a comparable fixed rate mortgage
• Homeownership is more affordable
• Qualifying is easier

Disadvantages

• When interest rates go up, payments go up, therefore there is chance that your monthly payments will increase
• Requires more budgeting discipline