Adjustable-Rate Mortgage (ARM)
An Adjustable-Rate Mortgage is a home loan with an interest rate that changes periodically based on a market index. Most ARMs begin with a fixed rate for an initial period — commonly 5, 7, or 10 years — before adjusting annually.
After the fixed period ends, the rate adjusts based on market conditions and a predetermined margin. There are caps that limit how much the rate can increase per adjustment and over the life of the loan, but monthly payments can still change significantly.
An ARM is not inherently risky — but it is not the right fit for every borrower. If you plan to sell or refinance before the adjustment period begins, an ARM can offer meaningful savings. If you plan to stay long-term, a fixed rate may provide more predictability.
Why This Matters: Understanding how an ARM works before you commit protects you from payment surprises down the road. The initial rate may look attractive, but you need to understand what happens when the adjustment period begins.
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