Adjustable-Rate Mortgage (ARM)
A mortgage with an interest rate that changes periodically based on a market index after an initial fixed-rate period.
What is Adjustable-Rate Mortgage?
An adjustable-rate mortgage (ARM) is a home loan with an interest rate that remains fixed for an initial period — typically 3, 5, 7, or 10 years — and then adjusts periodically based on a market index (commonly the Secured Overnight Financing Rate, or SOFR). ARMs are typically identified by two numbers: a 5/1 ARM has a fixed rate for 5 years, then adjusts annually. ARMs often start with lower rates than fixed-rate mortgages, making them attractive to buyers who plan to sell or refinance before the fixed period ends. Rate caps limit how much the rate can increase per adjustment and over the loan's lifetime.
Example
A borrower takes a 5/1 ARM at 5.5% on a $400,000 loan. For five years, the monthly payment is $2,271. When the rate adjusts in year 6, the index has risen, pushing the rate to 7.5% — increasing the monthly payment to $2,797. Rate caps (e.g., 2% per adjustment, 5% lifetime) limit worst-case exposure.
Source: Consumer Financial Protection Bureau — Adjustable-Rate Mortgages