With a fixed-rate mortgage, the interest rate stays the same during the life of the loan. But with an ARM, the interest rate changes periodically, usually in relation to an index of some type, and payments may go up or down accordingly.
Lenders generally charge lower initial interest rates for ARMs than for fixed-rate mortgages. This makes the ARM easier on your budget at first, than a fixed-rate mortgage. It also means you might qualify for a larger loan, because lenders sometimes make the decision about whether to extend a loan on the basis of your current income and the first year's payments. Moreover, your ARM could be less expensive over a long period than a fixed rate mortgage... for example, if interest rates remain steady or move lower.
Against these advantages, you have to weigh the risk that an increase in interest rates might lead to higher monthly payments in the future. It's a trade-off... you get a lower rate with an ARM in exchange for assuming more risk. However, for the past 25-years an ARM has been a safe bet.
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Is my income likely to rise enough to cover higher mortgage payments if interest rates go up?
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Will I be taking on other sizeable debts, such as a car loan or school tuition, in the near future?
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How long do I plan to own this home? (If you plan to sell soon, or not long after you buy, a rise in interest rates may not be the factor it could be If you plan to own the house for a long time.)
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Can my payments increase even if interest rates generally do not increase?
These are some questions worth considering...