Please explain what an ARM option is

CAN SOMEONE PLEASE EXPLAIN THIS TO ME IN ENGLISH.........I was playing around witha mortgage calculator and this was an option that came up....this was their explanation. I'm a little confuses because taking this option your payments are around $1,000 less a month.


3 Month Option ARM
An adjustable rate mortgage loan with four payment options: minimum payment, interest only, full principal and interest (30-year term) and full principal and interest (15-year term). These loans have an initial fixed interest rate for three months. After this period, the rate charged on the loan adjusts monthly, and payment option amounts adjust annually. Deferred interest, or negative amortization, is possible with these loans.

ARM is an adjustable rate mortgage versus a fixed rate mortgage. The ARM, depending on the terms will have a certain interest rate and then will fluctuate per the terms of the loan. The fixed rate is just that...fixed for the life of the loan.

So, my husband and I have a 5/1 ARM on our home. That means for the first 5 years our interest rate stays the same (the rate we closed at) and then after the 5th year, it will adjust or fluctuate each year depending on the current rates. It can go either up or down with limits on each end. So we are currently at 4.25% for 5 years and over the life of the 30 year loan if we do not refinance or sell the house the highest it can go is about 8 or 9% per the terms of our loan. This is a good option if you do plan to live in the house forever OR if you can deal with fluctuations after the 30 year period in order to get you lower payments initially. There are also 3/1 and 7/1 ARM's I believe.

If on the other hand you know that the house you are buying is the one you will be in until you retire or at least for a long time and you want to rely on the payment today being the same it will be in 30 years, then get a fixed rate mortgage. These rates will most likely be a little higher than the lowest rates going now but you are paying for the stability of payments and not having to be affected by rate fluctuations.

Hope that helps.