What Is an Adjustable Rate Mortgage (ARM)?

Written by Chloe GoodshoreFebruary 9th, 20233 minute read

An adjustable-rate mortgage (ARM) is a type of home loan that has a changeable interest rate.

Typically, you’ll start off your mortgage with a fixed interest rate for a certain time frame, after which your lender will periodically adjust your interest for the rest of your loan term.

ARMs offer an initial teaser rate that's lower than a conventional fixed rate, which can help homeowners preserve cash during the first few years of their loan. But once the adjustable period kicks in, there's little control over how much you'll pay.

👉 Jump to section: Types of ARMs | ARM caps | Should I get an ARM?

🏠 Ready to get started on your home buying journey?

Try Clever Real Estate’s free agent matching service!

Match with top local agents, choose the best fit, start touring houses.

100% free with no obligation. Available nationwide.

Learn More

Types of ARMs

Lenders offer a few kinds of adjustable-rate mortgages: Hybrid | Interest-only | Payment-option

Hybrid ARM

A hybrid ARM starts off with a fixed-rate period for a certain number of years. Then you move into the adjustable-rate period for the rest of your loan term, which usually totals 30 years.

So with a 10/1 ARM, you'll have a fixed rate for 10 years and then a new annual rate for the remaining 20 years.

Hybrid mortgages are typically expressed as: fixed duration/adjustment frequency. For example:

  • A 5/1 ARM is fixed for the first five (5) years and then adjusts every (1) year.
  • A 3/6 ARM is fixed for the first three (3) years and then adjusts every six (6) months.
  • A 15/15 ARM adjusts once at the 15-year mark.

Interest-only ARM

An interest-only ARM lets you pay just interest for the first few years of your loan. Once that period ends, you’ll start paying both principal and interest each month.

Depending on your specific loan terms, you could start making principal payments before your interest rate begins adjusting. Other times, your principal may kick in when your adjustable-rate period ends.

Payment-option ARM

A payment-option ARM lets you pick from different payment choices every month. Usually you can choose from a few structures:

  • A traditional principal and interest payment
  • An interest-only payment
  • A minimum payment, which may be lower than an interest-only payment

💰 Want to save more money? Find top local agents through Clever Real Estate, save thousands with built-in cash back savings on your home purchase! Learn more.

What are ARM caps?

Your lender can adjust the interest rate on your mortgage only up to a point. ARMs have three kinds of interest caps:

  • Your periodic adjustment cap and subsequent adjustment cap specify how much your lender can change your rate in one adjustment period (often six months or one year).
  • Your lifetime cap limits how much your lender can alter your rate over your entire repayment term.

Your ARM may also come with a payment cap, which specifies how much your monthly mortgage payment can change in one period or over the life of your loan.

» LEARN MORE: Payment caps, indexes, and margins

Why would I want an ARM?

Home buyers often like ARMs because they have lower interest rates and monthly payments than fixed-rate mortgages — at least during the initial fixed-rate period.

When is an ARM a good idea?

An ARM is a good idea if you expect to move in the next few years. On a 3-year ARM, for instance, you can enjoy low interest and monthly payments for three years and move out before the adjustable-rate period starts — so you won’t have to worry about higher interest and payments.

When is an ARM a bad idea?

An adjustable-rate mortgage could save you money at first, but if you don’t have the budget to cover higher or unpredictable interest rates and payments, you shouldn’t get an ARM.

If you're just trying to pay less in the short term but planning to stay put for a long time, an ARM might not be the best option for you. In fact, a fixed-rate mortgage can often save you money over the long run, and there are other ways to save more money when you buy.

💡 Quick Tip:

  • Find your realtor through a free nationwide service like Clever Real Estate, who offers built-in savings for buyers (cash back) as an added perk.
  • Ask the seller to cover some of your closing costs, aka seller’s assist — some loans place limits on seller’s assist amounts, so ask your agent for more info.
  • Look into federal and state home buyer assistance programs that you might qualify for. You may be able to get additional cash toward your down payment and closing costs.