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Adjustable-Rate Mortgage (ARM)
Definition
A mortgage with an interest rate that changes periodically based on a market index.
Explanation
ARMs start with a lower fixed rate for 3-10 years, then adjust annually based on SOFR + margin. Rate caps limit increases per adjustment and over the life of the loan. Common: 5/1 ARM (fixed for 5 years).
ARMs can save money if you sell or refinance before adjustment. Rates rising can substantially increase payments.
Example
5/1 ARM at 4% for 5 years on $350,000 = $1,671/month. After adjustment to 6.5% = $2,212/month.