Adjustable-Rate Mortgage (ARM)

Updated 2026-05-17

An Adjustable-Rate Mortgage (ARM) is a type of mortgage loan where the interest rate can change periodically over the life of the loan. Unlike a Fixed-Rate Mortgage, the interest rate on an ARM is not constant. It typically starts with an initial fixed-rate period, after which it adjusts up or down based on a specified index, such as the Secured Overnight Financing Rate (SOFR).

Key Characteristics

• Initial Fixed-Rate Period: ARMs begin with an introductory period (e.g., 3, 5, 7, or 10 years) during which the interest rate remains fixed.
• Adjustment Period: After the initial fixed-rate period, the interest rate adjusts at predetermined intervals (e.g., annually).
• Index: The interest rate is tied to a financial index, such as SOFR. The lender adds a margin to this index to determine the borrower's interest rate.
• Caps: ARMs typically include various caps to limit how much the interest rate can change:
  • Initial Adjustment Rate Cap: Limits the first interest rate adjustment after the fixed-rate period.
  • Subsequent Adjustment Rate Cap: Limits how much the interest rate can change in any subsequent adjustment period.
  • Lifetime Adjustment Cap: Sets the maximum interest rate that can be charged over the entire life of the loan.

Risks and Benefits

Benefits:

• Lower initial interest rates compared to fixed-rate mortgages, leading to lower initial monthly payments.
• Potential for lower payments if market interest rates decline.

Risks:

• Payments can increase significantly if market interest rates rise, potentially making the mortgage unaffordable.
• Less predictability in monthly housing costs compared to fixed-rate mortgages.

Refinancing from an ARM

Homeowners with an ARM may choose to refinance into a Fixed-Rate Mortgage through a Rate and Term Refinance to gain payment stability and protect against rising interest rates. This is a common reason for pursuing a refinance.