Adjustable-Rate Mortgage (ARM)
Quick Answer
A mortgage with an interest rate that changes periodically based on a market index.
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.
Frequently Asked Questions
What is Adjustable-Rate Mortgage (ARM)?
A mortgage with an interest rate that changes periodically based on a market index.
How does Adjustable-Rate Mortgage (ARM) work?
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.
Can you give an example of Adjustable-Rate Mortgage (ARM)?
5/1 ARM at 4% for 5 years on $350,000 = $1,671/month. After adjustment to 6.5% = $2,212/month.
Free Excel Templates
Also try our free Mortgage Amortization Schedule template
Create a detailed mortgage amortization schedule. See exactly how much principal and interest you pay each month over the loan term.
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