Adjustable-Rate Mortgages

An adjustable-rate mortgage is a home loan with an interest rate that may change over time. Most ARMs begin with an introductory fixed-rate period. During this time, your interest rate does not change. After that period ends, the rate may adjust at scheduled intervals based on the loan’s index, margin, and rate caps.

The CFPB explains that most ARMs have two periods: an introductory period when the rate is fixed, and a later period when the rate can move up or down based on market changes. Monthly principal and interest payments can increase, sometimes significantly, after the fixed period ends.

How ARM Rates Are Calculated

When an ARM adjusts, the new rate is typically based on:

Index: A benchmark interest rate that changes with market conditions.
Margin: A set percentage added by the lender.
Caps: Limits on how much the rate can increase or decrease during adjustment periods or over the life of the loan.

The CFPB explains that when the initial ARM period ends, the index and margin are added together to determine the new rate, subject to any applicable rate caps. 

Older ARM content often references LIBOR, but LIBOR is no longer a standard benchmark for new U.S. dollar loans. The New York Fed notes that USD LIBOR panel settings ceased on June 30, 2023, and SOFR is now the dominant U.S. dollar interest rate benchmark.

Why Buyers Consider ARMs

An ARM may be considered by borrowers who expect to own the home for a shorter period, want to compare initial payment options, or are comfortable understanding how future adjustments may affect their payment.

Things to Consider

ARMs can involve future payment changes. Before choosing an ARM, it is important to understand how often the rate can adjust, how high the payment could go, what caps apply, and whether you would still be comfortable with the payment if rates increase.