An Adjustable-Rate Mortgage (ARM) has a fluctuating interest rate. In most ARM Mortgages, the interest rate is fixed for a certain number of years and then allowed to move up or down in sync with current economic conditions. The flexible interest rate lowers the risk for the lender, and in exchange they offer a lower initial interest rate.

The three most important factors to consider when applying for an ARM are the adjustment period, the interest cap, and the index used to calculate the interest. The adjustment period consists of two parts: The length of time before the bank can adjust the rate, and after that period, how often the bank may adjust the rate.

The cap is the limit of individual and cumulative interest-rate adjustments. The cap has two parts: The first is the total amount of interest the bank can raise the loan in any given period, and the second is the total amount the bank can raise the interest rate. For example, an ARM could have a 4 percent step limit with a 7 percent total. This will prevent the bank from raising the interest more than 4 percent in any step and puts a limit ot the total interest rate increase to 7 percent. A 5 percent ARM could not rise above 12 percent or go up more than 4 percent at any step.

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