Adjustable-Rate Mortgage (ARM)
mortgageAlso known as: ARM, adjustable-rate mortgage
Updated · Written and reviewed by Konstantin Iakovlev
Detailed explanation
ARMs typically start with lower rates than fixed mortgages (initial period 0.5-1.5% lower). After the fixed period ends, rate adjusts annually (or per the contract) based on index (SOFR replaced LIBOR in 2023) + margin (typically 2-3%). Rate caps protect borrowers: typical 2/2/5 cap = 2% first adjustment max, 2% subsequent, 5% lifetime. ARMs work best for buyers planning to sell or refinance before the fixed period ends. Risk: rate could rise significantly if you stay past the fixed period — common cause of 2008-2009 foreclosures.
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