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ARM or Adjustable Rate Mortgages. ARMs have a fixed interest rate for a set amount of time, normally a short duration such as 3 to 5 years. The interest rate for this initial period is less than the current interest rates for fixed rate loans. At the end of the initial period, the interest rate will then be recalculated according to what the prevailing bank interest rate is. Then, the rate will be adjusted periodically according to your bank's contract with you. (It could be every 3 months, or yearly.) The advantage to the ARM is that it offers you a lower payment in the initial years and you can then refinance to a fixed rate mortgage after your ARM is up if you like. The disadvantage is that interest rates could skyrocket during your ARM and you would have to take a much higher rate than if you had gotten a fixed rate initially. The ARM is best suited for someone who is going to stay in their home for less than 5 years.
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