These interest rates on these variable or adjustable loans fluctuate along with monthly payments. With Adjustable Rate Mortgages (ARMs), periodic changes relating to a defined index are reflected in the interest rate. Payments may go up or down accordingly. This can be a very risky product if you cannot make the minimum monthly payments.
Advantages:

• Lower monthly payments
• Qualify for larger mortgage
• Easier to qualify for
• Great if only planning on living in a home for limited time period
• Good alternative for people who can't pay fixed loan rates

Common Adjustable Rate Mortgages include:

• Negatively Amortizing Loans
• Option ARMs
• Hybrid Loans
• Fixed-Period ARMs
• Two-Step Mortgage
• Convertible ARMs
• Graduated Payment Mortgages (GPMs)

Negatively Amortizing Loans
These types of loans offer payment caps as opposed to interest rate caps, which limit the amount the monthly payment can increase. Loans with a payment cap but no periodic interest rate cap may become negatively amortized. If you are unable to make a monthly mortgage payment, any unpaid interest will be added to the loan balance, increasing the overall balance. For this reason, poor financial planning can put borrowers in a deep hole quickly. There is, however, always the choice to pay the minimum monthly payment or the fully amortized amount due.
Advantages:

• Control cash flow
• Take advantage of low interest rates relative to the market
• Pay back money borrowed today at a depreciated value years from now (due to natural inflation)
• Excellent for people who understand how it works

Option ARM Loans
The Option ARM is one of the more innovative loans that will not require a set payment each month.
You get four payment options every month:

• Minimum Payment
• Interest-Only Payment
• 30-Year Amortized Payment
• 15-Year Amortized Payment

Hybrid Loans
Hybrid loans, or combined loans, consist of a combination of fixed-rate and adjustable rate loans. They usually begin with an initial fixed rate period and then adjust to ARM after the set fixed payment period expires. There are many varieties of hybrid loan options in the market today; here are some highlights.

5 popular types of hybrid loans:

• Fixed Period ARMs
• Two-Step Mortgage
• Convertible ARMs
• Graduated Payment Mortgages (GPMs)
• Buydown Mortgage

Fixed-Period ARMs
Fixed-Period Adjustable Mortgage Rates start with 3-10 years of fixed payments before adjustments. After the initial payment period expires, the interest rate will adjust annually.

• Fixed-period ARMs such as the 30/3/1, 30/5/1, 30/7/1 and 30/10/1 are usually tied to the one-year Treasury securities index.
• ARMs with an initial fixed period beside lifetime and adjustment caps usually have first adjustment cap.
• Limits the interest rate you will pay the first time a rate is adjusted.
• Allows for lower 30-year fixed interest rate because lenders have less to risk.

Two-Step Mortgage
Two-Step mortgages combine the aspects of fixed-rate and adjustable rate mortgages. They start with a fixed rate payment period with an interest rate slightly lower than the market rate for fixed-rate loans. Then, after a designated time period, the interest rate changes to a current or slightly above current interest rate and remains the same for the life of the loan.

• Fixed rate for 5-7 years.
• Very low starting interest rate, qualifying rate and initial monthly payments
• New rate is adjusted and the mortgage maintains new fixed rate for the remainder of time (23-25 years).

Common Two-Step Mortgages Include :

• 5/25 – Initial 5 year fixed-rate with remaining 25 years adjusted once.
• 7/23 – Initial 7 year fixed-rate with remaining 23 years adjusted once.

Convertible ARMs
Convertible Adjustable Rate Mortgages (ARMs) work like any other ARM, but you can turn it into a Fixed Rate Loan at any time. Many companies simply charge a small fee (1% of original loans, for example). Variations of this product depend on the chosen lender for a specific location. This is meant for those who want the low introductory rate of an ARM but the option for a fixed mortgage if the rates drop.

• Allows option to converts ARMs to a fixed-rate mortgage at scheduled times.
• New rate is established at the current market rate for fixed-rate mortgages
• Conversion interest rate is usually going to be a little higher than the present market rate
• Rate reduction options allow borrowers to adjust your mortgage to the current market rate for a minimal fee.

Graduated Payment Mortgages (GPMs)
Graduated Payment Mortgages start with low payments and increase by a fixed amount during designated times, usually each year for the first five years.

• Low initial payments allow borrowers to qualify for larger loan amount
• Loans will be negatively amortized during the early years of a loan and principal will be paid in later years.
• Rates, rate increases and mortgage payments vary depending on a lenders specific payment plan.

Buydown Mortgages
Buydown mortgages allow a borrower to "buy down" the interest rate by paying the lender a premium, such as additional discount points.

• Initial discounted interest rate that gradually increases to an agreed-upon fixed rate within 1-3 years.
• Allows borrowers to qualify for larger loan amount
• An initial lump sum to lender can reduce payments in the first few years of a mortgage