A conventional adjustable rate mortgage (ARM) usually involves low initial interest rates and monthly payments, but after a certain period of a fixed interest rate the outstanding balance will often change depending on a specific benchmark. A conventional loan will generally use the Constant Maturity Treasury Index (CMT) or the London Interbank Offered Rate Index (LIBOR) to calculate any changes in the interest rate, and this can lead to unexpectedly high payments some months.
The idea behind an adjustable-rate mortgage is to give homebuyers the opportunity to lower their initial payments. This doesn’t come without risk, though, because you may not know from month to month exactly how high your payments could go.
Just like a fixed rate conventional mortgage, this type of loan is good for people who have a good credit rating and can manage a fairly large down payment. It is also important to note, though, that since conventional loans are not guaranteed or insured by any government agencies, there might be some more uncertainty behind it.