Adjustable-Rate Mortgages “are tied to an index which is a measure of the lender’s cost of borrowing money. As the index rises, so will the interest rate on the adjustable loan. Where as fixed mortgages are a set interest rate that does not fluctuate so it is less risky. Also, look up balloon payments, make sure you don’t get penalized for paying off your loan sooner.
The interest rate and payment adjustments may or may not be scheduled to change at the same time. For example, the interest rate on some plans changes more frequently than the monthly payment, which may result in negative amortization. “This means that the additional interest will be added to the principal balance of the loan and may accrue additional interest itself,” Hymer says. If the monthly payments on an ARM are increasing, generally this is because the index is rising or it is a negative amortization ARM.
People with adjustable-rate mortgages wanting to know how their payments are calculated might contact their lender or review the language in their loan agreement.