Adjustable-Rate Mortgage (ARM)
An adjustable-rate mortgage (ARM) is a home loan with an interest rate that changes periodically based on a market index. ARMs typically start with a fixed rate for an initial period (commonly 5, 7, or 10 years), then adjust annually. They can save you money early on but carry the risk of higher payments later.
ARMs are named by their initial fixed period and adjustment frequency — a 5/1 ARM holds its rate fixed for 5 years, then adjusts once per year. The new rate is calculated by adding a margin (usually 2–3%) to a benchmark index such as SOFR. Most ARMs include caps that limit how much the rate can change per adjustment (typically 2%) and over the life of the loan (typically 5–6%).
For example, if you borrow $400,000 on a 5/1 ARM at 6.0% and rates rise sharply, your rate might adjust to 8.0% after year 5 — increasing your monthly payment from roughly $2,398 to $2,935. Caps protect you from extreme jumps, but you should stress-test your budget against the worst-case scenario before choosing an ARM.
ARMs make the most sense when you plan to sell or refinance before the fixed period ends, or when you expect rates to fall. Buyers who stay long-term typically prefer the predictability of a fixed-rate mortgage.
Key Takeaway
An adjustable-rate mortgage (ARM) is a home loan with an interest rate that changes periodically based on a market index. ARMs typically start with a fixed rate for an initial period (commonly 5, 7, or 10 years), then adjust annually. They can save you money early on but carry the risk of higher payments later.
Related Terms
Frequently Asked Questions
The '5' means your interest rate is fixed for the first 5 years. The '1' means it adjusts once per year after that.
ARMs carry more payment uncertainty than fixed loans. Rate caps limit extreme swings, but if you plan to stay in the home long-term, a fixed-rate mortgage offers more stability.
Yes. Many borrowers take an ARM for the lower initial rate and refinance into a fixed-rate mortgage before the adjustment period begins.
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