An adjustable rate mortgage is any mortgage that the rate changes at some point during the loan. These loans are also found in 15, 30 and sometimes 40 year loans. The majority of these loans have a fixed period during the loan; this usually ranges from the first 1 to 15 years. After this period they begin to "adjust" with the market. (The majority is 1, 5, 7, 10, and 15 years fixed but there are plenty of different types out there!!) The other portion of this mix is how often and to what index these loans follow. They can adjust every month, 6 months, or up to one year. Remember this is just a general description there are more types out there! The list of indexes these loans can follow is a long one.

Generally this loan will adjust every year until the rate catches up to where it should be. This gives you a payment cap, a maximum for the year that your minimum monthly payment will be. You will have fixed payments until the end of the year. They will go up like this every year until the current rate and the rate you are paying match. There are usually a few different payments that can be made on these types of loans. Included with your bill should be a 30 year fixed, and a 15 year fixed loan payment. With this loan it is possible to owe more than when you started. There are many different types of loans that could fall under this category.

The catch to this loan is that you aren't paying on the principle. In other words you can't pay off the loan unless, you pay extra on the principle, or you are contributing extra to an investment and use the investment to pay down the principle. Make no mistake at the end of the loan 100% of the principle is due!! Not good when you haven't been preparing! Not a problem if you have. If you use the same amount of money that you would be spending on a 30 year fixed loan and apply the difference to the principle you can pay off your mortgage earlier than 30 years. You will not be using a cent extra to do this!!