An adjustable-rate mortgage, or ARM, has an interest rate that is generally fixed for an initial period. After that period, the rate may increase or decrease at scheduled intervals based on the terms of the loan.
When the rate adjusts, it is generally calculated using a market-based index plus a fixed margin established in the loan documents. Rate caps limit how much the interest rate can change at the first adjustment, at later adjustments, and over the life of the loan.
An ARM may be worth considering when its initial fixed period and adjustment terms fit the borrower’s financial plans. However, the interest rate and monthly payment could increase, and refinancing before an adjustment is not guaranteed.
Available ARM programs, initial fixed periods, indexes, margins, adjustment schedules, caps, rates, and qualification requirements vary by lender and borrower. Our team can explain the available options and help you compare an ARM with a fixed-rate mortgage.