Mortgage & Home Loans

What is Adjustable-Rate Mortgage (ARM)?

An ARM is a mortgage where the rate is fixed for an initial period, then adjusts regularly based on market rates. Common structures are 5/1, 7/1, or 10/1—the first number is the fixed-rate years, the second is how often it adjusts after that.

When the adjustment kicks in, your new rate equals a benchmark index (like SOFR) plus a lender margin. If rates are up, your payment goes up.

ARMs have legal caps limiting how much the rate can increase per adjustment and over the loan's life. The trade-off for the lower initial rate is uncertainty—they work best if you plan to sell or refinance before the fixed period ends.

Quick Facts

Rate BenchmarksSOFR or other index plus margin

Initial AdvantageLower starting rate than fixed mortgage

Consumer ProtectionAdjustment caps and lifetime caps

Risk ElementPayment shock if interest rates rise

PRACTICAL EXAMPLE

You take a 5/1 ARM at 5.0%. For five years, your payment is steady. In year six, rates have gone up. With a 2% adjustment cap, your rate could jump to 7.0% — and your monthly payment jumps with it.

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RELATED TERMS

Learn More Key Concepts

MortgageA loan secured by real estate that you pay back in regular installments over a set term.

Interest RateThe percentage charged by a lender for borrowing mortgage funds, representing the annual cost of credit before fees.

Fixed-Rate MortgageA home loan featuring a constant interest rate that never changes over the entire lifespan of the loan.

AmortizationThe process of paying off a mortgage over time through regular, structured payments split between principal and interest.

RefinancingThe process of replacing an existing mortgage with a new one under different interest rates or terms.

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