Definition of an Adjustable Rate Mortgage (ARM)

An Adjustable Rate Mortgage is a type of loan where the initial mortgage rate remains fixed for a time --typically 3, 5, or 7 years. After this period, the rate begins to shift up or down depending on changes in the mortgage marketplace. 

ARM rates are bound to an interest rate index, often the current prime rate. After the initial period, the interest rate on loan will adjust upward or downward at regular intervals, following this index.

Benefits of ARM loans

The interest of an ARM is usually lower than a conventional fixed mortgage. You’ll likely have a low rate for the first 3, 5, or 7 years, which may allow you  to recoup costs and expenses or save money for later bills.

An ARM loan makes sense if you plan to pay off your mortgage quickly or sell your home within a few years. Learn more about ARM loans before you decide whether this type of loan is right for you.

ARM Loan Considerations

Planning is critical to considering an ARM loan as you’ll likely end up paying a higher interest rate once the initial rate begins to adjust. It’s rare that an adjustable rate mortgage would shift downward at the end of the initial period. 

Be prepared to make higher payments unless you refinance your ARM loan.

Gretchen Wegrich

Gretchen Wegrich is an editor at Lender411. She specializes in mortgage basics, personal finance and green living. She graduated with a bachelor's degree in writing from University of California, San Diego and previously worked at the Santa Cruz Sentinel. Contact her at gretchen@lender411com.