Mortgages paid back over 30 or 15 years are the most popular fixed rate mortgage products. The rate and monthly payment stay fixed for as long as the borrower keeps the loan.  An ARM is an adjustable rate mortgage. ARM's have an initial period of time in which the rate remains fixed followed by an adjustable period in which the rate can increase or decrease once a year.

When choosing between a fixed rate mortgage or an ARM, the first thing one should consider is how long they expect to own the home. This is predictable for some and not so predicable for others. For example, a younger single condo buyer that has plans for a family and anticipates moving within 3-10 years should consider an ARM.

Let's look at a $300,000 loan amount and compare the payments on a 5 year ARM at a rate of 3.75% vs. a 30 year fixed rate of 4.875%. The 5 year ARM would have a monthly payment of $1389 compared to $1587 for the 30 year fixed loan.  The savings of $198 per month adds up to a savings of $11,880 over the first 5 years. Having this extra money available for the down payment on the next home purchase is quite a benefit.

Before considering an ARM, you should know how the product works and how adjustments to the initial rate are determined. This is one of the topics that I discuss in the initial mortgage consultation I conduct with each of my clients.