There is a big difference between a fixed rate mortgage and an adjustable rate mortgage and that is the fact that with an adjustable rate mortgage the interest rate will fluctuate throughout the term of the loan. When the interest rate goes up and down so do your monthly payments.

The majority of mortgage will have a fixed rate at least for the first part of the mortgage and then throughout the rest of the term the rate will be adjusted from time to time. There will be set times when the interest rate will be reassessed and adjusted according to the market.

Chances are that if you choose an adjustable rate mortgage the interest will start out low when compared to what you would be paying for a fixed rate mortgage. This is done to act as a draw so that customers choose this type of mortgage even though the pose a higher risk to the borrowers. The risk is that the interest rate could go sky high unlike a fixed rate mortgage where the rates are set for the length of the loan.

Different adjustable rate mortgages have different fixed rate periods. Some are months while others are years. The most common form of adjustable rate mortgage is a hybrid and it has 5 years of fixed interest followed by an annual adjustment each year afterwards for the rest of the life of the loan. You can find some loans like this one that have a fixed period of 3, 7 or even 10 years all with adjustments annually after that.

The way that your mortgage will fluctuate after the fixed period, no matter how long it is, will be laid out for you clearly in the closing documents of the sale. There is an index that is used and the lender adds to this their margin and voila; they come up with your payment and your interest rate.

There is more than one index and the lender may use any one of them. There is the weekly constant maturity yield on the one-year Treasury Bill, this amounts to what the Treasury are paying, the interest financial institutions in the States are paying on their own deposits which is called the 11th District Cost of Funds Index and then there is the London Interbank Offered Rate which is the interest rate that international banks are charging other banks.

While you could find your interest rate going very high, there are some basic guidelines that are set in place to protect borrowers like you from getting taken advantage of. There are what are known as caps and these are there to keep the interest rates from going above certain levels.

There is more than one type of cap, there is the periodic rate cap and the lifetime cap as well as the payment cap. The periodic rate cap will set a limit of how much the interest can be changed in one adjustment. In other words your interest rate will only be able to go up so many percentages in one year. Now the lifetime cap on the other hand is the amount of percentages that the interest rate can go over the entire lifetime of the loan. And last but not least there is the payment cap and this cap applies to some loans and it does not go by percentages but by dollars and it spells out in dollars just how much your monthly payment can increase over the life of your loan.

There is also such a thing as an interest only adjustable rate mortgage. With these types of mortgage you will not have to pay any of the principle balance on the loan, only the interest for several years, often 10. After those years have passed the interest rates will be adjusted by an index just like any other adjustable rate mortgage but the loan does amortize at a faster rate. This does not mean that you cannot pay any of the principle, but you do not have to if you do not want to. This flexibility has made this type of mortgage a popular choice among many especially those whose income is not as stable as others.

You can also get an adjustable rate mortgage that allows you to convert it into a fixed rate mortgage but this will cost you an extra fee. There are many different varieties of adjustable rate mortgages and they are much more confusing than fixed rate mortgages. But their flexibility might make them perfect for your individual situation. What you need to do is talk to your lender to see what the different mortgages are that are available to you and then choose the one that will suit your circumstances and long term goals the best.