Adjustable-Rate Mortgage (ARM)
An adjustable-rate mortgage, or ARM, is a home loan where the interest rate can change over time. ARMs begin with a fixed introductory period, such as 3, 5, 7, or 10 years, during which the interest rate does not move. After that period ends, the rate adjusts at regular intervals based on a market index and a preset margin.
Every ARM has three components: an index, a margin, and a cap structure. After the introductory period, the new rate is determined by adding the margin to the index, unless that new rate exceeds the cap. Caps are expressed as three numbers, such as 2/1/5, which limit how much the rate can change at the first adjustment, at each adjustment after that, and over the life of the loan. In this example, 2/1/5, the rate cannot move more than 2 percent at the first adjustment, no more than 1 percent at each adjustment after that, and no more than 5 percent above the initial rate over the life of the loan.
ARM structure and adjustment frequency depend on the type of loan:
Conventional ARMs are tied to SOFR (the Secured Overnight Financing Rate). Most conventional ARMs today adjust every six months after the fixed period ends, which is why they’re labeled 5/6, 7/6, or 10/6 — the fixed period in years, followed by a 6 for the six-month adjustment cycle. A typical cap structure on these loans is 2/1/5.
FHA and VA ARMs use a different index, the CMT (Constant Maturity Treasury), and typically adjust once a year rather than every six months, which is why they’re labeled 5/1 rather than 5/6. They also tend to carry a more conservative first-adjustment cap, often 1/1/5, giving borrowers a bit more protection at that first reset.
FHA Reverse mortgages also use adjustable rates tied to the CMT index and will adjust monthly or annually depending on the program chosen with either a 5% or 10% lifetime cap.
ARM rates can move up or down depending on market conditions. Caps help protect borrowers from sudden or extreme payment changes, but borrowers should still understand how their payment may shift once the fixed period ends.
ARMs often start with a lower interest rate than comparable fixed-rate mortgages, which can make them attractive for borrowers who expect to move, refinance, or pay down the loan before the first adjustment period. They can also be useful in higher-rate environments when the initial fixed period provides meaningful payment relief.
While ARMs can offer flexibility and lower initial payments, they carry the risk of future rate increases. Borrowers should understand how the index works, how caps limit adjustments, and how their payment could change once the fixed period ends.