When selecting an ARM, the two main considerations are the length of the initial fixed rate period and the cap structure. The interest rate will be lower the shorter the initial fixed rate period to compensate for the risk that you may have to pay significantly higher interest rates sooner if there are large fluctuations in the index rate. For most borrowers who have determined that an ARM product is better than a fixed rate loan, it is usually most beneficial to choose an initial fixed rate period that is at least as long as the number of years that they intend to own the home. You should also compare the cap structure of the various ARM products available to you in order to understand how high the interest rate can be adjusted after the initial fixed rate period ends, how often the interest rate can be adjusted, how many percentage points the interest rate can go up at each interval after the first adjustment and what the lifetime maximum interest rate is. A common cap structure is 5/2/5 which means that the interest rate can go up by as much as 5 percentage points on the first adjustment when the initial fixed rate period expires and thereafter will adjust annually by no more than 2 percentage points with a lifetime maximum interest rate of 5 percentage points over the initial rate
