An Adjustable-Rate Mortgage (ARM) is a home loan where the interest rate remains fixed for an initial introductory period (e.g., 5, 7, or 10 years), after which the rate adjusts periodically (usually every 6 months or annually) based on benchmark financial indexes (such as SOFR).
Common structures include: - 5/1 ARM or 5/6m ARM: Fixed interest rate for the first 5 years, then adjusts every 1 year (or every 6 months) for the remaining 25 years. - 7/1 ARM: Fixed interest rate for the first 7 years.
ARM rate adjustments are governed by Interest Rate Caps: - Initial Adjustment Cap: Maximum percentage the rate can change on the first reset. - Periodic Adjustment Cap: Maximum percentage the rate can adjust in subsequent periods (usually 1% or 2%). - Lifetime Cap: Maximum total interest rate ceiling over the 30-year life of the loan (commonly +5% above starting rate).