Adjustable-Rate Mortgage (ARM) Loans: Start with Lower Payments and Flexible Terms

What is an Adjustable-Rate Mortgage (ARM) Loan?

An adjustable-rate mortgage (ARM) is a home loan that begins with a fixed interest rate for an introductory period and then adjusts periodically based on current market conditions. After the initial fixed term ends, the interest rate can increase or decrease depending on a financial index, which means your monthly payment may change over time. ARMs are often chosen by borrowers who don’t plan to stay in their home long-term or who expect rates to fall or their income to rise in the future. When used strategically, ARMs can provide significant savings during the early years of the loan compared to traditional fixed-rate mortgages.

Key Features of Adjustable-Rate Mortgage (ARM) Loans:

• Lower starting interest rates compared to fixed-rate mortgages
• Initial fixed-rate period (commonly 3, 5, 7, or 10 years)
• Interest rate adjusts after the fixed period ends
• Adjustment is based on a benchmark index plus a margin
• Rate caps limit how much the rate can increase per adjustment and over the life of the loan
• Can result in lower initial monthly payments
• Suitable for short-term homeowners or anticipated refinancers
• Offers flexibility in changing rate environments
• Available for primary homes, second homes, and investment properties

Types of Adjustable-Rate Mortgages (ARMs)

• 3/1 ARM – Fixed for 3 years, then adjusts annually
• 5/1 ARM – Fixed for 5 years, then adjusts annually
• 7/1 ARM – Fixed for 7 years, then adjusts annually
• 10/1 ARM – Fixed for 10 years, then adjusts annually
• Interest-Only ARM – Allows interest-only payments for a set period before principal payments begin