Mortgage lenders offer ARMS, or 'Adjustable Rate Mortgages' to help enable home buyers and owners find an acceptable loan product to meet their needs. The vast majority of mortgages are fixed rate loans such as 30 year and 15 year mortgages. But in certain situations an ARM offers many advantages under certain conditions. The first advantage is that ARMS offer lower rates, usually 1% less than the prevailing 30 year fixed rate. This can save a substantial amount of money every month. Arms are fixed for a certain period of time. ARMS usually have terms of 3,5,7, and 10 year fixed periods. All ARMS are a 30 year term so the term is 30 but the rate can change AND THAT MEANS YOUR PAYMENT CAN GO UP.

Example:

5/1 Arm- The "5" designates how long the ARM is fixed. The "1" designates how much the rate can change every year AFTER the initial fixed term of 5 years.

But there is a very important question you should ask your lender and that is how much the rate can move on the first adjustment, this is the adjustment that happens after 5 year initial fixed period is up. Most of the time, if the ARM is an agency product the maximum first adjustment is 5%. So if you bought a home using a 5/1 ARM at 3.5% and the day after you bought your home rates went to 10% for 6 years, the your rate would still be 3.5% for five years, but on the 6th year your rate would go to 8.5% because this is your first adjustment and rates can move up to 5% on the first adjustment. Let's say in year 7 the prevailing rates went to 1% and stayed there for a decade. Then you loan would only 'fall" 2% per year since the adjustment cap is 2% per year,

Terminology you should know and understand before you accept an ARM mortgage:

"Start Rate" This is the initial fixed period of your loan, in this case 5 years.

"First adjustment" This is the first adjustment after the start rate expires and usually has a cap of 5%

"Annual adjustment" This is the adjust that happens every after the initial period and first adjustment. This is usually capped at 2% per year up or down.

"Index" This is always tied to the LIBOR or T-Bill. Beware of any ARM that uses a different index. It's probably a set up for a really disastrous loan.

"Margin" The margin is added to the index to calculate your "fully indexed rate"

"Fully Indexed rate" is Index rate + Margin rate and rounded to the nearest 1/8th. 

"Adjustment date" The calculation above happens on an adjustment date agreed upon in the note. Usually your anniversary date.

"Lifetime CAP" This is the rate that your rate can never exceed.

To find out almost an INDEX RATE TO CALCULATE ARM RATES you can find that on Checkrates.com