What Is ARM (Adjustable-Rate Mortgage)?
A mortgage with an initial fixed rate for a set number of years, then a rate that adjusts periodically based on a market index.
Definition
An adjustable-rate mortgage has two phases. First, an initial fixed period (5, 7, or 10 years in common products like the 5/1, 7/1, and 10/1 ARM) during which the rate does not move. Second, an adjustment period where the rate resets annually based on a benchmark index (most US ARMs now use SOFR, the Secured Overnight Financing Rate) plus a margin set by the lender. ARMs start lower than fixed-rate mortgages, which lowers your initial payment. Caps limit how much the rate can move at any one adjustment and over the lifetime of the loan. A 5/1 ARM with caps of 2/2/5 means the rate can rise at most 2% at the first adjustment, 2% each adjustment after, and 5% total over the loan's life. ARMs work best if you plan to move or refinance before the fixed period ends.
Example
A 5/1 ARM at 5.75% versus a 30-year fixed at 6.75% on a $350,000 loan saves $210/month for the first five years, a total of $12,600 before the first adjustment.