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With an adjustable rate mortgage, the interest rates fluctuates. ARMs are tied to a number of indexes, usually published interest rates. The lender then adds an amount to the index, called a margin, which is customarily two percentage points or four percentage points. This number is the actual interest rate of the ARM. In general, the interest rates on an ARM changes every year, though, with some ARMs, there is a fixed rate mortgage for the first few years before the interest rate changes on a yearly basis. Most ARMs also have built in caps to reduce the risks of large increases in payments. A lifetime cap limits how much the interest rate can rise over the life of the loan, while periodic rate cap limits the amount your payments can raise at one time.

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