An adjustable-rate mortgage, or ARM, is a home loan with an interest rate that can change over time. Most ARMs start with a fixed interest rate for several years before entering an adjustable period.
That structure makes an ARM different from a fixed-rate mortgage, which keeps the same interest rate for the full loan term. Understanding the initial period, adjustment schedule, index, margin and rate caps can help you compare adjustable-rate mortgage options.
Adjustable-Rate Mortgage Basics
| Feature |
How It Works |
| Initial fixed-rate period |
The interest rate stays the same for a set number of years. |
| Adjustment period |
After the initial period, the rate can change at scheduled intervals. |
| Index |
A benchmark interest rate that changes with market conditions. |
| Margin |
A set number of percentage points added to the index to determine the adjusted rate. |
| Rate caps |
Limits on how much the rate can change at an adjustment or over the life of the loan. |
| Principal-and-interest payment |
Can increase or decrease after the initial period when the interest rate changes. |
What Is an Adjustable-Rate Mortgage?
An ARM is a mortgage that allows the interest rate to change during the loan term. Most modern ARMs are hybrid ARMs, meaning they combine an initial fixed-rate period with an adjustable period later in the loan.
For example, a 5/1 ARM has an initial interest rate that remains fixed for five years. After those five years, the rate can adjust once per year according to the terms of the mortgage.
A 5/6 ARM also has a five-year initial fixed-rate period, but its rate can adjust every six months afterward.
How Adjustable-Rate Mortgages Work
Initial Fixed-Rate Period
The initial period is the time at the beginning of an ARM when the interest rate does not change. Common ARM structures use initial periods of three, five, seven or 10 years.
The initial period determines when the loan can first adjust. A 3/1 ARM can reach its first adjustment sooner than a 7/1 or 10/1 ARM, for example.
The interest rate remains fixed during this period, but your total monthly mortgage payment can still change if expenses such as property taxes or homeowners insurance change.
Adjustment Period
Once the initial fixed-rate period ends, the ARM enters its adjustment period. The second part of the ARM's name generally tells you how often the interest rate can change.
An ARM ending in /1, such as a 5/1 or 7/1 ARM, can generally adjust once per year after the initial period. An ARM ending in /6, such as a 5/6 or 7/6 ARM, can generally adjust every six months.
The adjustment schedule does not mean the rate will change by a particular amount each time. The new rate depends on the loan's index, margin and applicable rate caps.
Index and Margin
After the initial period, an ARM's rate is generally calculated using an index plus a margin.
The index is a benchmark interest rate that changes with broader market conditions. The specific index depends on the mortgage and should be identified in your loan documents.
The margin is a number of percentage points set as part of the loan terms. Unlike the index, the margin generally does not change after closing.
For example, if an ARM's index were 4% and its margin were 2.5 percentage points, the fully indexed rate would be 6.5% before applying any limits required by the loan's rate caps. This is an illustration of the calculation, not a current mortgage rate.
Rate Caps
ARMs generally include rate caps that limit how much the interest rate can change.
There are three common types:
- Initial adjustment cap: Limits how much the rate can change at the first adjustment after the initial fixed-rate period.
- Subsequent adjustment cap: Limits how much the rate can change at later adjustments.
- Lifetime adjustment cap: Limits how much the rate can change over the life of the mortgage.
For example, a 2/2/5 cap structure would generally limit the first adjustment to 2 percentage points, later adjustments to 2 percentage points each and the total increase over the initial rate to 5 percentage points.
The caps on a particular mortgage can differ, so use the terms shown in your loan documents rather than treating one cap structure as standard.
Common Types of Adjustable-Rate Mortgages
The numbers in an ARM name tell you about its timing. The first number identifies the length of the initial fixed-rate period. The second identifies how often the rate can adjust afterward.
| ARM Type |
Initial Fixed-Rate Period |
Adjustment Frequency After Initial Period |
| 3/1 ARM |
3 years |
Once per year |
| 5/1 ARM |
5 years |
Once per year |
| 5/6 ARM |
5 years |
Every 6 months |
| 7/1 ARM |
7 years |
Once per year |
| 7/6 ARM |
7 years |
Every 6 months |
| 10/1 ARM |
10 years |
Once per year |
A longer initial period delays the first possible adjustment. Adjustment frequency becomes relevant only after that initial period ends.
Advantages and Disadvantages of an ARM
An ARM changes how interest-rate risk is distributed over the life of the mortgage. Its potential advantages and disadvantages depend on the loan terms, current pricing and how long you keep the mortgage.
Potential Advantages of an ARM
- Potentially lower initial pricing: Some ARMs may offer a lower initial interest rate than comparable fixed-rate mortgages, although this depends on current lender pricing and is not guaranteed.
- Different initial-period options: ARM structures allow you to compare how long you want the initial rate to remain fixed before adjustments can begin.
- Rates can move down as well as up: Depending on the index and the loan terms, an adjusted rate can decrease when market rates decline.
Potential Disadvantages of an ARM
- Future payments are less predictable: Your principal-and-interest payment can increase after the initial period if your rate rises.
- Plans can change: Selling or refinancing before the first adjustment may be part of your expected timeline, but neither is guaranteed.
- There are more terms to compare: The index, margin, adjustment schedule and rate caps all affect how the loan can behave later.
Who Might Consider an ARM?
An ARM may be worth comparing when its structure fits your expected timeline and you are comfortable with the possibility of future rate and payment changes.
For example, someone who expects to sell a home before the initial period ends may place more weight on the first several years of the mortgage. A borrower considering a 10/1 ARM gets a much longer initial period before the first possible adjustment than someone considering a 3/1 ARM.
But future plans are not certain. A move could be delayed, market conditions could make refinancing less attractive, or you might decide to keep the home longer than expected.
When evaluating an ARM, consider whether the mortgage would remain manageable if you still have it when adjustments begin. An ARM risk calculator can show how different rate scenarios could affect your principal-and-interest payment.
ARM vs. Fixed-Rate Mortgage
The primary difference between an ARM and a fixed-rate mortgage is whether the interest rate can change during the loan term.
| Feature |
Adjustable-Rate Mortgage |
Fixed-Rate Mortgage |
| Interest rate |
Fixed initially, then can adjust |
Fixed for the full loan term |
| First possible rate change |
After the initial fixed-rate period |
No scheduled rate changes |
| Principal-and-interest payment |
Can change after the initial period |
Does not change because of market interest rates |
| Rate risk |
Borrower is exposed to future adjustments within the loan's caps |
Borrower is not exposed to future rate adjustments on the existing loan |
A fixed-rate mortgage provides greater certainty about the interest rate over the loan term. An ARM provides an initial fixed period followed by the possibility of future adjustments. The better fit depends on the specific loan terms, how long you expect to keep the mortgage and how you would handle a potential payment increase.
A more detailed ARM vs. fixed-rate mortgage comparison can help you evaluate those differences.
What to Compare When Looking at ARMs
Two ARMs with the same name can still have different terms. A 5/1 ARM from one lender does not necessarily have the same pricing, margin or caps as another 5/1 ARM.
When comparing offers, look at:
- The initial interest rate and APR
- How long the initial rate lasts
- How frequently the rate can adjust
- The index used by the loan
- The margin added to the index
- Initial, subsequent and lifetime rate caps
- Any applicable interest-rate floor
- Points, lender fees and other closing costs
- The maximum principal-and-interest payment shown in your loan disclosures
The CFPB recommends understanding the adjustment schedule, index, margin and caps before choosing an ARM. Your Loan Estimate also includes an Adjustable Interest Rate table when the mortgage allows the interest rate to increase after closing.
You can also use an ARM payment calculator to model how different interest-rate assumptions could affect your payment over time.
Bottom Line
An adjustable-rate mortgage combines an initial fixed-rate period with the possibility of later interest-rate adjustments. A 3/1, 5/1, 5/6, 7/1, 7/6 or 10/1 ARM primarily differs in how long the initial rate lasts and how often adjustments can occur afterward.
An ARM is not automatically cheaper than a fixed-rate mortgage. Compare the actual rate, APR, index, margin, caps, fees and potential future payments for the loans available to you.
Frequently Asked Questions
What Do the Numbers in an ARM Mean?
The first number generally tells you how many years the initial interest rate remains fixed. The second tells you how frequently the rate can adjust after that period. A 5/1 ARM has a five-year initial period followed by annual adjustments, while a 5/6 ARM can adjust every six months after its first five years.
Are ARM Rates Always Lower Than Fixed Mortgage Rates?
No. An ARM may have a lower initial rate than a comparable fixed-rate mortgage, but that is not guaranteed. Mortgage pricing changes with market conditions and varies by lender, loan program and borrower profile.
Can an ARM Interest Rate Go Down?
Yes. An ARM rate can potentially decrease after the initial period if its index falls, depending on the loan's terms, rate caps and any applicable rate floor.
How Much Can an ARM Rate Increase?
The mortgage's rate caps determine how much the rate can change. Initial and subsequent caps limit changes at individual adjustments, while a lifetime cap limits the total change allowed over the life of the loan.
What Index Does an ARM Use?
The index depends on the particular mortgage program. The index should be identified in your loan documents and in the Adjustable Interest Rate table on your Loan Estimate.
Can You Refinance an ARM Into a Fixed-Rate Mortgage?
Yes. You can refinance an ARM into a fixed-rate mortgage if you qualify for the new loan. Refinancing replaces the existing mortgage and can involve closing costs, so the available rate, loan terms and costs affect whether refinancing makes sense.
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