What is an adjustable-rate mortgage (ARM)?

An adjustable-rate mortgage (ARM) is a home loan where the interest rate can change periodically after an initial fixed-rate period, leading to fluctuating monthly payments. The rate adjusts based on a market index plus a fixed margin.

How often does an ARM adjust after the fixed period?

Most common ARMs (like 5/1 or 7/1 ARMs) adjust annually after the initial fixed-rate period ends. Some less common types might adjust every six months.

What are interest rate caps on an ARM?

Interest rate caps limit how much your ARM's interest rate can change. There are typically initial adjustment caps (first adjustment), periodic caps (subsequent adjustments), and a lifetime cap (maximum rate the loan can ever reach).

Are adjustable-rate mortgages riskier than fixed-rate mortgages?

Yes, ARMs are generally riskier than fixed-rate mortgages because your monthly payments can increase significantly if interest rates rise after the fixed period, leading to potential payment shock. Fixed-rate mortgages offer predictable payments.

When is an ARM a good idea?

An ARM can be a good idea if you plan to sell or refinance your home before the initial fixed-rate period expires, if you expect a significant increase in your income, or if you are buying in a high-interest rate environment and anticipate rates to fall.

Can I refinance an ARM into a fixed-rate mortgage?

Yes, many ARM borrowers plan to refinance into a fixed-rate mortgage before their initial fixed period ends. However, your ability to refinance depends on current interest rates, your credit score, income, and the equity in your home.

What is the difference between a 5/1 ARM and a 7/1 ARM?

A 5/1 ARM has a fixed interest rate for the first five years, then adjusts annually. A 7/1 ARM has a fixed interest rate for the first seven years, then adjusts annually. The 7/1 ARM typically has a slightly higher initial fixed rate than a 5/1 ARM due to the longer period of rate certainty.

Adjustable-Rate Mortgage (ARM) Guide | One Percent Finance