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Adjustable-rate loans, also known as variable-rate loans, are attractive because they usually offer a lower initial interest rate than fixed-rate loans. However, the interest rate fluctuates over the life of the loan based on market conditions, but the loan agreement generally sets maximum and minimum rates. When interest rates rise, generally so do your loan payments; and when interest rates fall, your monthly payments may be lowered.

If you are considering an adjustable-rate loan, you should ask your lender the following questions so that you can make a more informed decision.

ARM initial interest rate and APR

• How long does the initial rate apply?
• What will the interest rate be after the initial period?

ARM features

• How often can the interest rate adjust?
• What is the index and what is the current rate?
• What is the margin for this loan?

Interest-rate caps

• What is the periodic interest-rate cap?
• What is the lifetime interest-rate cap? How high could the rate go?
• How low could the interest rate go on this loan?
• What is the payment cap?
• Can this loan have negative amortization (that is, increase in size)?
• What is the limit to how much the balance can grow before the loan will be recalculated?

An adjustable-rate home mortgage loan is not for everyone. The only way you will know if it is the choice for you or not is by gathering adequate information and comparing it with other options.