An ARM loan is an adjustable rate mortgage. There are basically two types of mortgages, some with fixed rates and some with variable or adjustable rates. Fixed rate mortgages are loans where the interest rate on the loan stays the same throughout the loan period. An adjustable rate mortgage is where the interest rate can be changed every year throughout the loan based on market indexes.
The advantages of an ARM loan are that the lender usually gives a lower interest rate, because you are assuming more risk as opposed to a fixed rate where the lender could be loaning you money in the future on the fixed rate loan that gains them less profit. Or in other words, a bank in the future could be charging more interest on a loan than your fixed rate is.
With an ARM loan a bank is willing to give an initially lower interest rate because they can possibly raise your interest rate on the loan to accommodate higher market interest rates in the future. This way the bank isn't stuck with a lower than market fixed rate in the future, when it's less profitable for them.
ARM loans come with caps. Caps are set amounts that the loan interest cannot exceed. ARM loans have an overall cap and some have periodic caps. These caps by law ( overall caps) cannot exceed a certain amount.
Some things to consider with taking a ARM loan is, if you plan on possibly selling your home. If you are considering buying a home as a way to make money by fixing it up and or reselling it in the near future, an ARM loan might be right for you. You will get a lower interest rate on the loan, which could mean less cost and more profit.
Other things to consider is the ability to pay higher interest rates as the loan fluctuates with the market indexes. If you are planing to buy a new car and your interest rate on your ARM goes up that year, it could put you in a financial bind.
There is a chance that interest rates could go down. This doesn't mean that your ARM loan interest might go down, but its possible. With a fixed rate, if the market indexes go down you still have to pay the same set interest rate. But with an ARM its possible that your interest rate could go lower.