What Is Adjustable-Rate Mortgage?

An adjustable-rate mortgage (ARM) is a home loan with an interest rate that remains fixed for an introductory period—typically 5, 7, or 10 years—then adjusts annually based on a market index. ARMs usually start with a rate 0.50%–1.00% lower than comparable fixed-rate loans, making them attractive if you plan to sell or refinance before the adjustable period begins.

With a 5/1 ARM on a $350,000 loan starting at 5.75%, your initial monthly payment would be about $2,042. After the 5-year fixed period, your rate could adjust up to 2% per year, with a lifetime cap typically 5% above the start rate. If it hit the 10.75% lifetime cap, your payment could rise to roughly $3,300 per month.

Key Facts

• Common ARM structures: 5/1, 7/1, and 10/1 (fixed years / adjustment frequency)
• Initial rate discount: Typically 0.50%–1.00% below 30-year fixed rates
• Annual adjustment cap: Usually 2% per year after the fixed period
• Lifetime rate cap: Typically 5% above the initial rate

Frequently Asked Questions

When does an ARM make sense?

An ARM works well if you plan to sell or refinance within the fixed-rate period. For example, if you expect to move within 5–7 years, a 5/1 ARM gives you a lower rate without the risk of adjustments since you will be out of the loan before it resets.

What index do most ARMs use today?

Most ARMs are tied to the Secured Overnight Financing Rate (SOFR), which replaced LIBOR. Your rate at each adjustment equals the current SOFR value plus a fixed lender margin, typically 2%–3%.