Even though many homebuyers recognize the danger of adjustable rate mortgages ("ARMs"), they are willing to accept this mortgage because it means lower initial monthly payments. When interest rates reached a record low, some borrower opted for a fixed rate loan. On the other hand, borrowers who could not qualify for a low fixed rate due to bad credit received better offers with an ARM. As rates begin to rise, the popularity of adjustable rate mortgages will likely re-surface. To attract potential borrowers, mortgage providers and brokers advertise low introductory rates, also known as teaser rates.

Because of the risk of adjustable rate mortgages, lenders offer teaser rates as a way to attract customers. Accepting a teaser rate can be beneficial or problematic. It really depends on the number of adjustment periods that accompany the loan, and whether rates will increase or decrease.

If bad credit prevents a homebuyer from acquiring a low fixed rate on their mortgage loan, an adjustable rate makes it possible for the borrower to rebuild his credit. There are different types of adjustable rate mortgages. Some introductory rates are only offered for a year. At the end of this term, the rate is adjusted. On the other hand, the majority of teaser rates have longer terms, perhaps three to five years. This allows enough time for borrowers to improve their credit score, which will help them qualify for a good rate in the future. Five or seven year adjustable rate periods are also ideal for borrowers who plan on moving before an adjustment occurs.

Unfortunately, many borrowers fail to recognize the extent of mortgage payment increases. Within a five year period, mortgage rate could possibly rise two percentage points or higher. If so, you can expect a huge increase in monthly payments. Lenders are required to provide a "worst case scenario" to all borrowers choosing an adjustable rate mortgage.