A mortgage with an interest rate that is fixed for an initial period, then adjusts periodically based on a market index.
Full Definition
An ARM starts with a fixed rate for an initial period (typically 3, 5, 7, or 10 years), then adjusts at specified intervals (commonly every 6 or 12 months) based on a market index (typically SOFR, which replaced LIBOR). A 5/1 ARM is fixed for 5 years, then adjusts every year. ARMs have rate caps that limit how much the rate can change at each adjustment and over the life of the loan — for example, a 2/2/5 cap means the rate can increase up to 2% at first adjustment, 2% at each subsequent adjustment, and 5% over the life. ARMs can save money if you plan to sell or refinance before the first adjustment. They carry rate risk if rates rise significantly.
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