Adjustable-rate mortgage (ARM)
Also called: variable-rate mortgage
An adjustable-rate mortgage (ARM) is a home loan whose interest rate can change after an initial period, based on a market index plus a set margin and within any caps the loan sets. Your monthly payment can rise or fall when the rate adjusts.
By Beacon · Updated
How it works
An ARM begins with an initial rate that can stay the same for months, a year or a few years. After that introductory period, the rate changes at regular intervals. Each new rate is based on an index, a broad measure of market interest rates, plus a margin, the number of percentage points the lender adds. When the index rises, your rate and payment can rise with it.
Caps limit how far the rate can move. An initial adjustment cap limits the first change, commonly two or five percentage points; a subsequent cap limits each later change, most commonly one or two points; and a lifetime cap limits the total change over the loan, most commonly five points. Caps can limit decreases as well as increases, and two ARMs with the same starting rate can have different caps.
Before choosing an ARM, it helps to know the first adjustment date, how often the rate changes after that, each cap, and the highest payment the loan allows, which your Loan Estimate can show. Counting on selling or refinancing before the first adjustment carries risk, because home values, income and interest rates can all change.
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Sources and further reading
Examples are illustrative and focus on U.S. personal finance. This page is educational, not individual financial, investment, tax, or legal advice. Read our editorial approach or report a correction.