Adjustable Mortgage Rates (ARMs) provide lower rates during an initial period (often 1-7 years) on your home loan. Interest rates on the mortgage adjust with interest rates in the marketplace (represented by a specific index). This is important because the interest rates, and your monthly payments, are periodically adjusted as the index changes. What this means is as the interest rate rises, your monthly payment rises. Additionally, your payments fall as interest rates fall.
Typically, caps are put in place to protect the borrower from drastic increases in the interest rate.
What is it?
Lower initial rates
May allow borrowers to qualify for a larger loan
Caps provide security against rapid rate increases
Choose 1, 3, 5, 7 or 10 years at a fixed rate prior to first adjustment
May be eligible for conversion to a fixed-rate mortgage