What is an ‘Adjustable-Rate Mortgage – ARM’

An adjustable-rate mortgage is a type of mortgage in which the interest rate applied on the outstanding balance varies throughout the life of the loan. Normally, the initial interest rate is fixed for a period of time, after which it resets periodically, often every year or even monthly. The interest rate resets based on a benchmark or index plus an additional spread, called an ARM margin.

Also called a variable-rate or floating rate mortgage, ARMs take a number of different forms.

Typically, ARMs are expressed as two numbers. In most cases, the first number indicates the length of time the fixed-rate is applied to the loan, but there is no set formula defining what the second number indicates. For example, a 2/28 ARM and a 3/27 ARM feature a fixed rate for two or three years, respectively, followed by a floating rate for the remaining 28 or 27 years. In contrast, a 5/1 ARM boasts a fixed rate for five years, followed by a variable rate that adjusts every year (indicated by the one). Similarly, a 5/5 ARM starts with a fixed rate for five years and then adjusts every five years. Contrary to that formula, a 5/6 ARM has a fixed rate for five years and then adjusts every six months. If you're considering an adjustable-rate mortgage, you can compare different types of ARMs using a mortgage calculator.