ADJUSTABLE-RATE MORTGAGE (ARM):

An adjustable-rate mortgage is a mortgage whose interest rate and monthly payments vary throughout its life. ARM’s typically start with an unusually low interest rate (see teaser rate) that gradually rises over time. If the overall level of interest rated drops, as measured by a variety of different indexes (see index), the interest rate of your ARM generally follows suit. Similarly, if interest rates rise, so does your mortgage’s interest rate and monthly payment. Caps (see also periodic caps and lifetime caps) limit the amount that interest rates can fluctuate. Before you agree to an adjustable-rate mortgage, be sure that you can afford the highest payments that would result if the interest rate on your mortgage increased to the maximum allowed.