The variety of home mortgage loans available today can be mind-boggling. It is critical that a home buyer understand the home mortgage products offered by lenders. An adjustable rate mortgage, or ARM, is a mortgage in which the payment fluctuates over time in response to changes in prevailing interest rates. In exchange for accepting a higher level of risk than a fixed-rate mortgage, lenders offer ARMs to consumers at initially lower interest rates. Of course, when interest rates rise or fall, your monthly payment increases or decreases accordingly on a regular schedule subject to the caps specified in the loan terms. Examples of ARMs are the balloon mortgages, which offers low initial payments with a large, lump-sum payment at the end of the loan, and two-step mortgages, which adjust once and then remain fixed for the life of the loan. The benefits of ARMs include lower initial interest rates and potentially lower monthly payments. Risks associated with ARMs include the unpredictability of the interest rate markets, which could ultimately price your monthly payment outside your ability to pay.

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