What Is Adjustable-Rate Mortgage (ARM)?
Adjustable-Rate Mortgage (ARM): A loan with a fixed rate for an initial period, then a rate that adjusts with a market index.
Also called: ARM
An adjustable-rate mortgage (ARM) has a fixed rate for an initial period, then adjusts on a set schedule based on a market index plus a margin.
How ARMs are described
A 7/6 ARM has a fixed rate for 7 years, then adjusts every 6 months. Other common options are 5/6 and 10/6.
Key terms
- Index: the market rate the loan follows, commonly SOFR
- Margin: a fixed amount added to the index
- Caps: limits on how much the rate can change at the first adjustment, each later adjustment, and over the life of the loan
Caps are often written like "2/1/5": up to 2% at the first adjustment, 1% each adjustment after that, and 5% total.
When an ARM makes sense
If you expect to sell or refinance before the fixed period ends, an ARM's lower starting rate can save money.
Risk
If rates rise, your payment can go up substantially after the fixed period. Lenders often qualify you at a higher rate to make sure you can handle it.