Adjustable Rate Mortgages (ARMS):A variable or flexible rate mortgage with an interest rate that varies according to the financial index it is based upon. To limit the borrower's risk, the ARM may have a payment or rate cap. Payments increase or decrease on a regular schedule with changes in interest rates; increases subject to limits

• Balloon Mortgage- Offers very low rates for an Initial period of time (usually 5, 7, or 10 years); when time has elapsed, the balance is clue or refinanced (though not automatically)
• Two-Step Mortgage- Interest rate adjusts only once and remains the same for the life of the loan
• ARMS linked to a specific index or margin

Advantages

• Generally offer lower initial interest rates - An adjustable rate mortgage in today’s market is a good decision if you can not get a fixed rate mortgage at or below 7.5%. We all know that mortgage rates only have one way to go and that’s up. If you plan on refinancing again in two years or more expect interest rates to be around 7% or higher. An adjustable rate mortgage gives you the ability to save a few bucks a month but also forces you to refinance that mortgage within a set amount of time.
• Monthly payments can be lower
• May allow borrower to qualify for a larger loan amount

Watchout

• An option arm mortgage is more of a tool then anything. You have to be very careful with this loan or it can really bite you in the butt. This loan is for homeowners who can get a better return on their money by putting it in the stock market, IRAs or other investment opportunities. With the option arm you have 4 different options to pay each and every month, hints the name option arm. You can make a below interest only payment, an interest only payment, a 15 year adjustable rate mortgage payment or a 30 year adjustable rate mortgage payment. If you make the below interest only payment each month you will start to see your mortgage balance increase. In order for this to make any sense, the money that you save and invest needs to make up the difference of your mortgage increase.