A type of mortgage in which the interest rate paid on the outstanding balance varies according to a specific benchmark. The initial interest rate is normally fixed for a period of time after which it is reset periodically, often every month. The interest rate paid by the borrower will be based on a benchmark plus an additional spread, called an ARM margin.

An adjustable rate mortgage is also known as a “variable-rate mortgage” or a “floating-rate mortgage”.

Features:

  • Your interest rate and monthly principal and interest (P&I) payments will remain the same for an initial period of 5, 7, or 10 years, and then will adjust annually.
  • Loans available in a variety of longer terms.
  • Includes an interest rate cap that sets a limit on how high your interest rate can go.

Benefits:

  • Typically ARMs have a lower initial interest rate than on a fixed-rate mortgage.
  • The interest rate cap limits the maximum amount your P&I payment may increase at each interest rate adjustment and over the life of the loan.
  • May provide flexibility if you expect future income growth or if you plan on moving or refinancing within a few years.

Considerations:

  • Monthly principal and interest payments may increase when the interest rate adjusts.
  • Your monthly principal and interest payments may change every year after the initial fixed period is over.