Most lenders tie ARM interest rate changes to changes in an index rate. These indexes usually go up and down with general movement of interest rates. If the index rate goes up, so does the borrower's mortgage rate, and, in most circumstances, and will probably have to make higher monthly payments. On the other hand, if the index rate goes down, the borrower's monthly payment may go down.
Lenders base ARM rates on a variety of indexes. Among the most common are the rates on one, three, and five year Treasury Securities. Another common index is the National or Regional average Cost of Funds to savings and loan associations. A few lenders use their own cost of funds, over which, unlike other indexes, they have some control. The borrower should ask what index will be used and how often it changes. Also, they should ask how it has behaved in the past and where it is published.