Interest rates on ARMS are lower than fixed rate loans for one primary reason. With an ARM, lenders assume you intend to hold on to the home for a relatively short period of time. As a result, they are willing to offer lower interest rates because they don’t have to worry about getting stuck with a bad rate for 15 or 30 years.
With a fixed rate mortgage, the lender runs the risk of lending you money at a relatively low rate for a long period of time, only to see rates rise later during the life of the mortgage. This leaves the lender in a negative situation. Lenders make every effort to avoid such scenarios.
The disadvantage associated with ARM loans is the inherent risk. With an ARM, the interest rate can be adjusted on a quarterly or yearly basis depending upon the terms of the loan. In the event that the real estate market settles down and interest rates rise, you might not able to make payments and left with a home of nominal equity.
For short term home ownership situations, adjustable rate mortgages almost always make sense. While an ARM may seem an obvious answer, just be careful you are not stuck holding the bag if rates shoot up.