Learn what an adjustable-rate mortgage is, how resets work, and why payment risk matters after the initial fixed period ends.
An adjustable-rate mortgage (ARM) is a mortgage whose interest rate can reset after an initial period according to a benchmark and margin formula. It usually starts with a lower teaser or introductory rate than a comparable fixed-rate mortgage.
After the initial fixed period, the rate adjusts on scheduled reset dates. The new rate depends on the underlying benchmark, the contractual margin, and any caps or floors. Borrowers benefit if rates stay low, but payment shock can occur if rates rise.
A 5/1 ARM may carry a fixed rate for 5 years and then reset annually. If the benchmark has risen by the first reset, the monthly payment can increase materially.
A borrower says, “If my ARM starts lower than a fixed mortgage, it will always be cheaper.”
Answer: Not necessarily. Future resets may raise the total borrowing cost above that of a fixed-rate loan.
Mortgage: An ARM is one major type of mortgage contract.
Fixed-Rate Mortgage (FRM): A fixed-rate mortgage keeps the rate constant instead of resetting.
Variable-Rate Mortgage (VRM): VRM is a closely related mortgage structure with floating-rate features.