An adjustable-rate mortgage has an interest rate that can change after an initial period.
Initial and Adjustment Periods
Many ARMs begin with a rate fixed for a stated period and then adjust periodically. A 5/6 or 7/6 ARM, for example, describes an initial fixed period followed by recurring adjustment intervals.
Index and Margin
The index is the market benchmark referenced by the loan. The margin is an amount established by the mortgage terms that is added to the index to help determine the adjusted rate.
Rate Caps
- Initial adjustment cap
- Periodic adjustment cap
- Lifetime cap
Do Not Depend on a Future Refinance
A refinance depends on future rates, credit, income, property value, equity, and lending rules. It should not be the only reason an ARM appears affordable.
Homebuyer takeaway: Before choosing an ARM, understand what the payment could become if rates rise.
Sources
CFPB: Fixed vs. Adjustable Mortgage
CFPB: ARM Index and Margin
CFPB: ARM Rate Caps