An adjustable-rate mortgage (ARM) has an interest rate that is fixed for an initial period and then adjusts at set intervals based on a market index plus a margin stated in your note.
How an ARM works
Most ARMs today are "hybrid" loans named for their structure: a 5/6 ARM is fixed for five years and then adjusts every six months; a 7/6 and 10/6 work the same way with longer fixed periods. Each adjustment is limited by caps written into the loan: a cap on the first adjustment, a cap on each later adjustment, and a lifetime cap above the start rate. Your Loan Estimate shows all three, along with the index and margin.
When an ARM can make sense
- You expect to sell or pay off the loan before the fixed period ends.
- The ARM's start rate is meaningfully below the fixed-rate alternative and you can comfortably afford the payment at the capped rate.
- You want a lower payment now and understand that it may rise later.
What to weigh
- After the fixed period, the rate and payment can go up as well as down. You are not required to refinance, but if rates are higher then, your payment will be too.
- Refinancing later depends on qualifying again at that time; it is not something anyone can promise today.
- We will show you the fully indexed rate and the maximum possible payment next to the fixed-rate option so you can compare them honestly.
Our blog post "Adjustable-Rate Mortgage: Can You Afford the Reset?" walks through the math.