Choose the ARM That Suits You Perfectly. - By: Scott Staudt

Most borrowers now know that ARM stands for Adjustable Rate Mortgage, or a mortgage that has an interest rate that changes every certain period. ARMs became important when interest rates were escalating and banks no longer wanted to take the risk of lending at 4 or 5% and then seeing their costs of funds skyrocket to 10 or 12%.

For a long time, interest rates remained fairly steady and banks had no problem setting a rate on a mortgage because their cost of funds remained fairly stable.

ARMs are for thirty years usually, with interest rates fluctuating in the course of that term. Most homeowners don't actually worry about the term of an ARM, but rather how often the rate "resets". If you think you will own your home for a long time, you should try to get the longest fixed rate period you are able to.

Most of the time, the five year adjustment period is what is best for most borrowers. If the ARM rate adjusts more often, you will be exposed to higher costs. If your ARM is at 6% for five years, for instance, it will not go up, even if rates increase to 8%, then back down to 7%.

With an annually adjusted ARM, the homeowner would have had all of the increases in between. Most ARMS have an interest rate cap, however, to guard the borrower from runaway interest rates as well.

One of the most critical factors in the ARM you choose is how long you plan on living in the house. If you only plan on being in it for a few years, your main worry should be what the initial rate on the ARM is. If you project being in a home for six or seven years, try to negotiate a seven year adjustment. Normally you cannot get an adjustment period of more than 7 years.

You also have to understand which base rate is being used for the rate adjustment: government bonds, the LIBOR, CDs or others. Each of these has advantages and disadvantages, depending on the outlook of the homeowner. Remember that if you have an ARM that resets often, your monthly payment will change often.

This is not an ideal situation for many homeowners, who have to live on a fixed budget.

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