Adjustment Periods

• The time period between changes in the interest rate on your ARM is called an adjustment period. This time period is different from loan to loan, but it can be anywhere between one month to five years. If the period is five years, your loan is called a 5-year ARM.
  
  

Adjustment Caps

• Your ARM may have limits on how much the interest rate can adjust, how often this can happen, or how high your payment can go. When the ARM "comes due," a cap of some kind will probably be in place.
  
  

Payment Changes

• The most likely event that occurs when your ARM reaches an adjustment period is a change in your payment. A difference of a few percentage points in interest can cause your monthly payment to rise drastically. You may hear this referred to as "payment shock."
  
  

Negative Amortization

• Negative amortization means that the amount you owe on the loan actually goes up instead of down as you're making payments. When your ARM reaches an adjustment period, you may find that your initial low payments have not been enough to cover the interest. That interest has been added to the principal, resulting in a higher loan balance.
  
  

Refinance or Conversion

• You may be able to refinance your original ARM with a fixed, 30-year mortgage. This will depend on your current financial and credit situation, as well as the value of the home. Some lenders may allow you to convert the ARM to a fixed rate without refinancing, but the lender will usually charge you to do this.