This type of mortgage loan is usually lower than the fixed rate and the lower rate means lower payment that in turn means easier qualification.

Let’s take a look at some terms that help you understand ARM better.

• Margin – This is the lender’ s markup and where they make their profits. The margin is added to the index rate to determine your total interest rate.

• ARM Indexes – These are benchmarks that lenders use to determine how much the mortgage should be adjusted. The more stable the index is the more stable your adjustable loan remains. Consider both the index and the margin when you are shopping around.

• Adjustment Period – Refers to the holding period in which your interest rate will not change. You will come across ARM figures like 5-1 that means your mortgage interest remains the same for five years and then it will adjust every year.

• Interest Rate Caps – This is the maximum interest a lender can charge you.

• Periodic caps – The lenders may limit how much they can increase your loan within an adjustment period. Not all ARMs have periodic rate caps.

• Overall caps- Mortgage lenders may also limit how much the interest rate can increase over the life of the loan. Overall caps have been required by law since 1987.

• Payment Caps – The maximum amount your monthly payment can increase at each adjustment.

• Negative Amortization – In most cases a portion of your payment goes toward paying down the principal and reducing your total debt. But when the payment is not enough to even cover the interest due, the unpaid amount is added back to the loan and your total mortgage loan obligation is increased. In short, if this continues you may owe more than you started with.

• Negative amortization is the possible downside of the payment cap that keeps monthly payments from covering the cost of interest.

• As you compare lenders, loans and rates remember Henry Moore who said, “What’s important is finding out what works for you.”

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