With this type of loan there are caps for adjustments each year and for the life of the loan. When the adjustment period begins the rate could adjust up or down depending on the market conditions and the index the rate is based on.

On a 3 year arm your first adjustment will happen after you make your 35th payment. Usually the caps are set at 2/2/6, which limit the increases and decreases in your rate.

Under normal economic climate in the interest market, the longer the fixed period is, the higher the interest rate. In other words, a Hybrid with a 5-year fixed rate period has a higher interest rate than a Hybrid with only a 3-year fixed period. This rule also holds true with almost all interest bearing financial products, such as Certificates of Deposits. For instance, a 12-month CD almost always offers a higher Annual Percentage Yield (APY) than a 6-month CD.

Many home buyers with less than perfect credit profiles prefer 3/27 ARM over 30-Year Fixed Rate mortgage, because for poor credit borrowers, 30-Year Fixed Rate loans often carry much higher interest rates. Bad credit home buyers can re-build their credit profiles by making on time payments in the first three years. They then refinance and get a better loan with a lower interest rate. By using a 3/27, bad credit home buyers can purchase the home today and start building equity rather than having to wait.

A 3 year ARM may be a good solution if you only plan to live in your house for a few years. The lower rate offered by a 3/1 Adjustable Rate Mortgage also makes this loan popular for first time home buyers because it can be used to build higher credit scores during the initial fixed interest period.