What is an Adjustable-Rate Mortgage

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What is an Adjustable-Rate Mortgage?

Also known as a variable-rate loan, the interest rate for an adjustable-rate mortgage (or an ARM loan) can-and will-fluctuate during the term of the loan.

advantages: This is best understood in comparison to a fixed-rate loan. Ironically, the volatility of the interest rate is what can make it either an advantage or a disadvantage.
For example, if the current rate is high (relative to what you could have got with a lower fixed-rate), your monthly mortgage payment will be higher; the opposite holds true as well. The fact that the payment can be lower in a low interest rate environment has made them very popular in the past few years.
Flexibility: This mortgage product could offer you the flexibility to refinance at a latter point when your circumstances or needs change.
This product could also come with a lower payment.
disadvantages: Again, the unpredictability of rates can either be an advantage or disadvantage, depending entirely on what you are paying versus what you could have been paying if you had a fixed-rate mortgage.
Another disadvantage is that you could arrive to the end of an adjusting period and find you CANNOT refinance out of that loan. If you compound this with the existence of a teaser rate reset, this could land you in a disastrous situation.
However, the most critical disadvantage affects borrowers that don't completely understand the terms of their loan-especially those that have "teaser" rates (very low, introductory fixed rates that increase once the period expires).
Alleged "predatory lenders" have used teaser rates to lure inexperienced or uneducated borrowers into mortgages (most often with so-called subprime mortgages) that could become unmanageable and ultimately lead into foreclosure.

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