Hybrid ARMs: This type of ARM (adjustable rate mortgage) comes with an initial fixed-rate period with the interest rate changing annually afterwards. The fixed-interest stage can be anywhere from three to ten years. The interest rate tends to drop on the shorter periods. For example, a 3/1 Hybrid ARM would have a fixed-rate for the first three years, then adjust annually.

Interest-only ARMs: Interest-only ARMs signifies that you will pay only the interest on the mortgage for a specified number of years, not the principal. This gives you a reduced monthly payment for that period. The interest-only period tends to be anywhere from five to ten years. For example, a 5/1 ARM would come with interest-only payments at a fixed-rate for 5 years, then it readjusts annually.

Following the initial interest-only period, the loan amortizes so the mortgage is paid off by the end of its term. Caution is necessary with this because this might lead to much higher monthly payments, even if the interest rate remains the same.

Payment-option ARM: This kind of mortgage permits you to choose between several monthly payment options: an interest-only payment, a minimum payment, or a 15, 30, or 40-year fully amortizing payment. This offers the borrower additional flexibility to make one of several payment options on the mortgage every month.

Consider the different ARMs as presented in this article, and choose the one that works best for you.