Also written as:
ARM
A mortgage with an interest rate that starts fixed for a set period, then adjusts up or down on a schedule based on market rates. Usually shown as 5/1, 7/1, or 10/1 ARM.
An adjustable-rate mortgage (ARM) starts with a fixed interest rate for an introductory period — typically 5, 7, or 10 years — then adjusts annually after that based on a market index. A 7/1 ARM is fixed for 7 years, then adjusts every 1 year afterward.
The appeal of an ARM is the lower starting rate compared to a 30-year fixed. The risk is that your rate (and payment) can climb if market rates rise during the adjustable period. There are caps on how much your rate can change in any single year and over the life of the loan, but you should know what those caps allow for in the worst case before signing.
ARMs make sense for buyers who plan to sell or refinance before the fixed period ends. They're risky for buyers who plan to stay long-term in an uncertain rate environment.
Example
On a 7/1 ARM at 5.75% (vs. 6.5% on a 30-year fixed), your payment for the first 7 years is about $1,867 — roughly $155/month lower than the fixed. After year 7, the rate could rise or fall.
Also known as
ARM, variable-rate mortgage, adjustable mortgage, 5/1 ARM, 7/1 ARM, 10/1 ARM