GLOSSARY — REAL ESTATE TERMS
Adjustable-Rate Mortgage (ARM)
An adjustable-rate mortgage starts with a fixed interest rate for an initial period, then adjusts periodically based on a market index, meaning the monthly payment can rise or fall over the life of the loan.
What the numbers mean
In a "5/1 ARM," the rate is fixed for the first 5 years, then adjusts annually after that based on a market index plus a set margin. A "7/1 ARM" works the same way with a 7-year fixed period. Rate caps limit how much the rate can move at each adjustment and over the life of the loan.
Why buyers choose an ARM
ARMs typically start with a lower initial rate than a comparable fixed-rate mortgage, which can make sense for buyers who plan to sell or refinance before the fixed period ends -- but carries real risk if plans change and the rate adjusts upward in a higher-rate environment.
WHAT TO ASK YOUR LENDER ABOUT AN ARM
- Ask exactly when the fixed period ends and how the new rate is calculated
- Get the specific rate caps in writing (initial, periodic, and lifetime)
- Be honest with yourself about how long you actually plan to keep the loan
- Compare worst-case ARM payments against a fixed-rate option before deciding
Is an ARM riskier than a fixed-rate mortgage?
It carries more long-term uncertainty since your payment can increase after the fixed period, though rate caps limit how much it can move at once.
When does an ARM make the most sense?
Most commonly for buyers who are confident they'll sell or refinance before the initial fixed period ends, capturing the lower introductory rate without exposure to future adjustments.
What is a rate cap?
A limit on how much the interest rate can increase at each adjustment period and over the life of the loan, which protects the borrower from unlimited rate increases.