Adjustable-rate mortgage (ARM)

An adjustable-rate mortgage has an initial fixed-rate period followed by periodic rate adjustments against a published index. The product names (5/1 ARM, 7/6 ARM, 10/1 ARM) encode the structure: the first number is the initial fixed period in years, the second is the adjustment frequency after that (1 for annually, 6 for every six months).

How it works: during the initial fixed period, the borrower pays the agreed-upon initial rate, which is typically lower than a comparable 30-year fixed. After the initial period ends, the rate adjusts to the index (commonly SOFR-based now, replacing LIBOR) plus a fixed margin specified at closing. The adjusted rate is bounded by caps: a typical 2/2/5 cap structure limits the first adjustment to 2 percentage points, each subsequent adjustment to 2, and the lifetime increase to 5 above the initial rate.

Why it matters: ARMs trade some predictability for a lower initial rate. The case for an ARM is strongest when the borrower expects to sell or refinance before the initial fixed period ends, a 7/1 ARM at 0.75% below a 30-year fixed saves real money over the first seven years, and if the loan is gone before year eight, the post-adjustment risk never materializes. When the rate gap is small (under 0.25%), ARMs rarely pay for themselves.

Common gotcha: the post-adjustment payment can be substantially higher than the initial-period payment. The PITI calculator at /tools/mortgage-payment models three standard scenarios (rates flat, rates up by 2%, and the lifetime cap) so the realistic payment range is visible up front rather than as an unwelcome surprise after the initial period ends.