An Adjustable-Rate Mortgage (ARM) is a loan product that provides an initial fixed interest rate for a set period on the loan, typically 3, 5, or 7 years. After this initial period, the interest rate then adjusts to a new rate that reflects current market conditions. This adjustment may increase or decrease the loan rate and thus increase or decrease your mortgage payment.

The initial and adjusted rates are comprised of the index rate and the margin. The index used will vary, but two of the most commonly used indexes are the London Interbank Offered Rate (LIBOR), and the US Treasury Bill. The index rate fluctuates based on current market conditions. The margin is the additional percentage amount charged by the lender, which generally stays the same through the life of the loan.

ARM loans have minimum and maximum rates called caps, that set the amount that the rate can adjust during the life of the loan as well as by how much the rate can increase or decrease in one adjustment.

An ARM product name describes the length of time the interest rate is fixed, as well as how often the rate adjustment will be made. For example, in a 5/1 ARM, the interest rate is fixed for the first 5 years, and will then adjust once every additional year.

• The initial rate is often lower than a traditional fixed-rate loan.
• A lower rate may help you afford a home you might not qualify for with a traditional fixed-rate loan.
• If market conditions are favorable, your monthly payment may decrease once the loan has entered the adjustment period.
• If you do not plan on staying in a home for more than 3-5 years, an ARM loan may be a good option.

• If market conditions become unfavorable, the rate may increase significantly once your loan enters adjustment, causing your monthly payment to go up.

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