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An Adjustable-Rate Mortgage (ARM) is a home loan where the interest rate can change over time, usually after an initial fixed-rate period.
In Depth
Unlike a fixed-rate mortgage, the interest rate on an ARM isn't set for the entire loan term. It starts with a fixed rate for a few years (e.g., 3, 5, 7, or 10 years), and then it adjusts periodically based on a market index. This means your monthly payments can go up or down, making them less predictable than fixed-rate loans. ARMs often have lower initial interest rates, which can be attractive if you plan to move or refinance before the rate adjusts.
Example
Sarah chose an ARM with a 5/1 structure, meaning her interest rate is fixed for the first five years and then adjusts annually.