Loans with an interest rate that can change during the loan's term are called adjustable-rate mortgages (ARMs). Most of the time, the interest rate on these loans is fixed for the first part of the loan term. After that, it can change based on how the market is doing. The first rate on an adjustable-rate mortgage is lower than the first-rate on a fixed-rate mortgage. It lets you buy a more expensive home.
Most adjustable-rate mortgages are paid off over 30 years, and the initial rate is usually fixed for anywhere from one month to ten years. There is a "margin" and an "index" for every ARM loan. Loan margins are usually between 1.75 and 3.5%, depending on the index and the amount borrowed compared to the value of the property. The index is the financial instrument that the ARM loan is tied to, such as the 1-Year Treasury Security, LIBOR (London Interbank Offered Rate), Prime, 6-Month Certificate of Deposit (CD), and the 11th District Cost of Funds (COFI). When it's time for the ARM to change, the margin will be added to the index, and the new interest rate will usually be rounded to the nearest 1/8 of 1 percent.
Then, that rate will stay the same until the next time it needs to be changed. This can happen every year, but there are some things that limit how much the rates can change. "Caps" are the name for these things. Say you had a "3/1 ARM" with an initial cap of 2%, a lifetime cap of 6%, and an initial interest rate of 6.25. In the fourth year, the highest rate you could get would be 8.25%, and the highest rate you could get over the life of the loan would be 12.25%. We've been helping people buy their dream homes for a long time, and we love what we do.