Loan types

ARM (Adjustable-Rate Mortgage)

A mortgage whose interest rate is fixed for an initial period and then adjusts periodically based on an index plus a margin, within set caps.

What does ARM mean?

An ARM starts with a fixed teaser period — five years on a 5/1, seven on a 7/1 — usually at a lower rate than a comparable fixed loan. After that the rate resets on a set schedule to an index plus a fixed margin, bounded by initial, periodic and lifetime caps. The gamble is rate direction: an ARM rewards borrowers who sell or refinance before the first reset and punishes those who hold through rising rates.

Frequently asked

How does an ARM interest rate adjust?

After the fixed intro period ends, the rate resets to an index (a public benchmark such as SOFR) plus a fixed margin your lender sets.

When the index moves, your rate and payment move with it — but only within the initial, periodic and lifetime caps written into the loan.

What do the numbers in a 5/1 ARM mean?

The first number is how many years the rate stays fixed; the second is how often it adjusts afterward.

A 5/1 ARM is fixed for five years, then adjusts once a year; a 7/1 holds its rate for seven years, then adjusts annually.

Is an ARM a good idea?

It can be if you plan to sell or refinance before the fixed period ends — you get a lower starting rate and leave before the risk.

If you will hold the loan long-term, a fixed rate removes the chance of a rising payment down the road.