Adjustable rate mortgages, also referred to as "variable rate mortgages," have interest rates that fluctuate with the market. As a result your monthly payment may go up or down depending on what market interest rates are doing. Generally, an adjustable rate mortgage will have a starting interest rate that is lower than an equivalent fixed rate mortgage, thus allowing a borrower to qualify for a larger mortgage. However, the fluctuating payment that results can wreak havoc on the borrower's budget.
ARM's have limits on when, how much and how often the interest rate can adjust, and these limits will vary from loan to loan. For example, a 3/1 ARM will have an initial fixed interest rate for 3 years and then will adjust once per year thereafter. Similarly, a 5/1 ARM will have an initial fixed interest rate for 5 years and then will adjust once per year thereafter. A 5/1 will almost always have a higher initial interest rate because of the additional 2 years of fixed rate security you receive.
A 3/1 ARM will sometimes be referred to as a "3 year fixed" mortgage. Similarly, a 5/1 ARM can be referred to as a "5 year fixed" mortgage.
