What does "Adjustable-rate mortgage (ARM)" mean?

Definition

An adjustable-rate mortgage, or ARM, has an interest rate that changes over time. It starts with a fixed rate, and after that, the rate can go up or down based on market conditions.

How ARMs Fit Into Mortgages

An adjustable-rate mortgage (ARM) often appears when choosing loan terms. It typically starts with a lower fixed interest rate for a set period. After that, the rate can change at specified intervals. Example: A 5/1 ARM has a fixed rate for five years, then adjusts annually. These adjustments are tied to a market index, which means payments can go up or down. It's not guaranteed to always stay low or become unaffordable. A common misconception is that ARMs always lead to higher payments, but they adjust based on current rates, which can vary.

People Want To Know

What is an adjustable-rate mortgage ARM?

An adjustable-rate mortgage (ARM) has an interest rate that starts fixed for a set period, typically 5, 7, or 10 years. After this initial period, the rate can adjust annually based on market conditions, which means your monthly payments can increase or decrease. The adjustments are usually tied to a specific index plus a margin set by the lender.

Do you need 20% down for an ARM?

A down payment of 20% is not required for an adjustable-rate mortgage (ARM). Lenders may allow lower down payments, often as low as 3% to 5%, depending on the borrower's creditworthiness and the specific loan terms.

Is a 7 year ARM still a 30-year mortgage?

Yes, a 7-year ARM is still a 30-year mortgage. The loan has a fixed interest rate for the seven years, after which the rate adjusts periodically for the remaining 23 years of the loan term.

What are current adjustable mortgage rates?

Adjustable mortgage rates are determined by market conditions and can fluctuate. ARMs adjust based on a specific index, such as SOFR, plus a margin set by the lender. For the most accurate current rates, contact lenders directly.

Flip the Script - Master mortgage objections

More From The Mortgage Glossary

Amortization

Loan amortization is how your mortgage payments are divided between paying off the loan's principal and interest over time. Early on, more of your payment goes to interest, and later, more goes toward the principal.

Annual Percentage Rate (APR)

The annual percentage rate, or APR, is the total cost of borrowing money. It includes the interest rate plus any additional lender fees, giving you a more complete picture of the loan’s cost.

Appraisal

An appraisal is a professional estimate of a home's market value. Lenders require this to ensure the loan amount is not more than the home is actually worth.