Adjustable-Rate Mortgage (Arm)

Adjustable-Rate Mortgage (ARM) Key takeaways
An adjustable-rate mortgage (ARM) is a home loan with an interest rate that is fixed for an initial period and then adjusts periodically based on a benchmark index plus a fixed margin.
ARMs typically start with lower rates than comparable fixed-rate mortgages but expose borrowers to future rate increases.
Common ARM types include hybrid ARMs (e.g., 5/1), interest-only ARMs, and payment-option ARMs.
Important features to check before signing: index, margin, adjustment frequency, caps (periodic and lifetime), and any payment caps that could cause negative amortization. Explore More Resources

What is an ARM?
An adjustable-rate mortgage (ARM), also called a variable- or floating-rate mortgage, has an interest rate that changes after an initial fixed period. The adjusted rate equals a benchmark index (such as the prime rate, SOFR, or short-term Treasury rates) plus a fixed lender margin. The index can move up or down with market conditions; the margin remains constant. How ARMs work
An ARM has two main phases:
Fixed period — the introductory rate remains unchanged for a set time (commonly 2, 3, 5, 7, or 10 years).
Adjustment period — the rate resets at predetermined intervals (monthly, annually, every five years, etc.) based on the index plus margin. Explore More Resources

Other features that affect cost and risk:
Conforming vs. nonconforming: conforming loans meet standards for sale to Fannie Mae/Freddie Mac; nonconforming loans do not.
Rate caps: limits on how much the rate can rise per adjustment and over the life of the loan.
Payment caps and negative amortization: if a payment cap prevents the monthly payment from covering interest, unpaid interest may be added to the principal (negative amortization). Types of ARMs
Hybrid ARMs — Combine a fixed initial period with a variable period. Notation like 5/1 means 5 years fixed, then adjusts every 1 year. Example: 2/28 = 2 years fixed, then variable for 28 years.
Interest-only (I-O) ARMs — Borrower pays only interest for a set time (often 3–10 years), then begins paying principal plus interest, which can cause a large payment increase.
Payment-option ARMs — Offer multiple payment choices (full principal+interest, interest-only, or a minimum payment). Minimum payments may produce negative amortization and growing principal. Explore More Resources

Advantages and disadvantages
Advantages
Lower initial interest rate and monthly payment compared with many fixed-rate loans.
Useful if you plan to sell or refinance before adjustments begin.
Extra cash flow early on can be used for other goals or investments. Disadvantages
Future payments are unpredictable; rising market rates increase monthly payments.
More complex loan terms (indexes, margins, caps) require careful review.
Risk of large payment increases after introductory or interest-only periods; potential negative amortization with payment caps. Explore More Resources

How the variable rate is calculated
After the fixed period ends, the new rate = index + margin. For example, if the index is 2% and the margin is 2.5%, the mortgage rate becomes 4.5%. Although the index changes, the margin set by the lender does not. Lenders must disclose the index, margin, adjustment frequency, and any caps. Rate caps to know
Periodic cap — maximum change at each adjustment (e.g., 2% per year).
Lifetime cap — maximum increase over the life of the loan (e.g., 5% above the initial rate).
* Payment cap — limits how much the monthly payment can change; if insufficient to cover interest, unpaid interest may be added to the principal. Explore More Resources

ARM vs. fixed-rate mortgage
Fixed-rate mortgage: interest rate and monthly payment remain constant for the life of the loan — predictable but usually starts at a higher rate.
ARM: lower initial rate but exposes borrower to future rate volatility. ARMs can be advantageous for short-term ownership or when you expect higher income or falling rates, while fixed-rate loans suit borrowers who value stability. Is an ARM right for you?
An ARM may suit you if:
You plan to sell or refinance before the adjustable period begins.
You expect your income to increase and can absorb future payment rises.
* You are comfortable with risk and have an emergency fund to handle higher payments. Explore More Resources

An ARM may be a poor choice if:
You need predictable monthly payments.
You cannot handle significant payment increases or negative amortization risk. What to check before you sign
Exact index and how it’s calculated.
Lender margin.
Initial fixed period and adjustment frequency.
All caps (periodic, lifetime, and payment caps).
Whether the loan allows negative amortization.
Prepayment penalties and any other fees. Explore More Resources

Bottom line
ARMs offer lower initial rates and can make sense for buyers with short-term plans or flexible finances, but they carry the risk of higher future payments and more complex terms. Read disclosures carefully and compare scenarios (including worst-case rate increases) before committing. If unsure, consult a mortgage professional or financial advisor.