Advantages and disadvantages of Adjustable Rate Mortgages

Adjustable Rate Mortgages are those that have an interest rate which simply with time, often once in 6 or 12 months' time period. Using a financial index and a margin the rate of interest is adjusted at these intervals. This financial index is used to check the general interest rate trends.
Advantages of Adjustable Rate Mortgages

Money Saver
The initial interest rate with ARM is always lower than the interest rate of a FRM for the same term. If the borrower can financially afford to the risk of increase in rate in future, then it makes sense to take service of ARM and save money by paying a lower interest rate and it is the biggest plus. Although they seem insignificant, even a difference of half percent interest rate can also mean thousands of dollars spent/saved.

If the existing interest rates are high and one bets them to come down later, them it is sensible to go in for ARM at that time as once the interest rate starts to decline so will his monthly payment and also the borrower profits for the initial time period say a year or two because of low teaser or the initial interest rate, as compared to the fixed rate mortgages.

Advantage of transferability
It is another plus with ARM. The loan can be transferred to the new buyer of the property/loan from the existing owner of the property/loan. It is a big plus if interest rates are high because the ARM payments come down with the interest rates after the rates peak and start slipping down. By taking over a person's ARM, the new owner saves himself from getting attached to a high rate fixed rate mortgage service.
Requires No Refinancing At Times of Dropping Interest Rates
An ARM service user doesn’t need to re-finance their mortgage when the interest rates are dropping because at the same time his monthly interest and overall payments will also be dropping at each scheduled rate evaluation.

Disadvantages of adjustable rate mortgages
Deceptive Amortization
The monthly mortgage payment has a cap on it, but interest rate increase does not. Therefore, if a borrower has a $1000 monthly payment and is currently paying $1000 his payment is maximized. At the same time, if the loan's rate is evaluated and increased by 1% per month, this 1% is not added to the monthly payment of $1000, because it is already at the monthly maximum payment. However, it is added to the ARM balance and the balance is literally increasing.

Misleading Teaser
Teaser is the initial monthly interest rate for the ARM and it is lower than the interest rate found on a comparable fixed rate mortgage. However, this teaser soon disappears and in majority of cases it surpasses the interest rate of FRM. It is especially misleading for a newbie borrower and they are the ones who fall into the trap. So ARM should not be judged or chosen based on its teaser rate.

Currently Low Rates But Possibility to Go Up
This is the big disadvantage that the ARM service users face and it is the existing situation almost everywhere. This is like a trap and as rates are going high so will be the monthly payments and necessitates refinance option if there is steep increase in the interest rates.