Adjustable-rate mortgage (ARM)

Also called variable-rate mortgage

A home loan with a fixed introductory rate for a set period, after which the rate resets periodically based on a market index.

What it means

An ARM starts with a fixed rate for an initial period, then adjusts at regular intervals. Notation shows both: a 5/1 ARM is fixed for five years and then adjusts once a year, while a 5/6 ARM is fixed for five years and then adjusts every six months. The new rate equals a benchmark index plus a fixed margin set in the loan.

Caps limit how much the rate can rise at the first adjustment, at each later adjustment and over the life of the loan. Cap structures vary by lender and loan, so reading the loan estimate closely matters. ARMs tend to suit borrowers who expect to sell or refinance before the fixed period ends, or who can absorb a higher payment later.

Example

Suppose a $300,000 30-year 5/1 ARM starts at an illustrative 5.5%, for a payment of about $1,703.37. After five years the balance is about $277,382; if the rate resets to 7.5%, the payment on the remaining 25 years rises to about $2,049.83.

How it’s used

Buyers who expect to move within the fixed period
Borrowing when fixed rates are high relative to ARM starting rates
Stretching early-year affordability, with the risk understood

Strengths and weaknesses

Strengths

Introductory rate is often lower than a comparable fixed rate
Payment can fall if market rates drop
Caps limit how far the rate can climb

Weaknesses

Payment can rise sharply after the fixed period
Harder to budget long term
Refinancing later is not guaranteed if rates rise or finances change

Good to know

Check the worst-case payment at the lifetime cap before committing.

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.