Adjustable Rate Mortgage (ARM)
What Is an Adjustable-Rate Mortgage?
An adjustable-rate mortgage (ARM) is a home loan with an interest rate that can change over time.
It typically starts with a fixed-rate period (such as 5 or 7 years), followed by periodic adjustments based on a benchmark index.
Why It Matters in a Mortgage
ARMs often offer:
- Lower initial rates
- Lower initial payments
- Rate adjustment risk later
Rates adjust based on an index plus a margin, influenced by economic conditions shaped by the Federal Reserve.
If rates rise significantly, payments may increase.
How It Works
Example: 5/1 ARM
First 5 years → Fixed rate
After year 5 → Adjusts annually
Rate caps limit how much the rate can increase per adjustment and over the life of the loan.
ARM vs. Fixed Rate
ARM → Payment uncertainty after fixed period
Fixed → Stable payment throughout term
FAQs About ARMs
Can ARM payments decrease?
Yes, if rates fall.
Are there limits to increases?
Yes, caps are built into contracts.
Are ARMs risky?
They carry more rate risk than fixed loans.
Related Terms
