What is an adjustable-rate mortgage (ARM)? It’s a type of home loan with an interest rate that adjusts up or down with other U.S. interest rates. ARM rates change at regular, pre-specified intervals (such as one, five or seven years). In general, when interest rates are low, ARM rates are low. When rates go up, ARM rates rise, too.
Why would you choose an ARM?
- You want a lower starting interest rate. An ARM’s introductory interest rate is usually lower than that of a fixed-rate mortgage.
- You believe U.S. interest rates are going to remain stable or decrease.
- You plan to move in a few years and pay off your loan. In that case, interest rate changes are not necessarily a big concern.
- If interest rates drop, your payments could automatically decrease without you needing to refinance your loan.
By the way, you can choose an adjustable-rate option for an FHA or VA loan, too.
More about ARMS
To protect you from significant rate shifts, ARMs always include limits (caps) on how much your interest rate can change.
- A periodic cap limits the interest rate increase/decrease from one adjustment period to the next.
- A lifetime cap limits how much your interest rates can increase or decrease over the life of your loan.
For more information on ARMs, download the Consumer Financial Protection Bureau’s Consumer Handbook on Adjustable-Rate Mortgages.