Adjustable Rate Mortgage (ARM)
Date of Last Revision: August 8, 2026
An Adjustable-Rate Mortgage (ARM) is a home loan with an interest rate that changes periodically. ARMs start with a lower fixed introductory rate, but the rate and monthly payments later adjust up or down based on market conditions.
How ARM Loans Work
Initial fixed period: The interest rate stays the same for an introductory phase, typically lasting 3, 5, 7, or 10 years. Common modern structures include 5/6 or 7/6 ARMs, adjusting every six months after the initial period.
Adjustable period: Once the intro period ends, the rate resets periodically (such as every six months or annually).
Index and margin: Your new rate is calculated by adding a fluctuating market benchmark index (like the Secured Overnight Financing Rate, or SOFR) to a fixed lender margin.
Consumer Protections and Rules
Rate caps: Federal regulations and CFPB guidelines require limits on how much your interest rate can rise or fall during adjustments and over the total life of the loan.
Disclosures: Lenders must provide a specialized disclosure booklet (the Consumer Handbook on Adjustable-Rate Mortgages or CHARM booklet) and advance notice before your monthly payment changes.
Consumer guidance: Only consider an ARM if you can comfortably afford potential payment increases if market interest rates rise.
What are rate caps with an adjustable-rate mortgage (ARM), and how do they work?
Adjustable-rate mortgages (ARMs) typically include several kinds of caps that control how your interest rate can adjust up or down.
There are three kinds of caps:
Initial adjustment cap. This cap says how much the interest rate can increase or decrease the first time it adjusts, after the fixed-rate period expires. It’s common for this cap to be either two or five percent – meaning that, after the first rate change, the new rate can’t be more than two (or five) percentage points higher or lower than the initial rate during the fixed-rate period.
Subsequent adjustment cap. This cap says how much the interest rate can increase or decrease in the adjustment periods that follow. This cap is most commonly one or two percent, meaning that the new rate can’t be more than one or two percentage points higher or lower than the previous rate.
Lifetime adjustment cap. This cap says how much the interest rate can increase or decrease in total, over the life of the loan. This cap is most commonly five percent, meaning that the rate can never be more than five percentage points either higher or lower from the initial rate. However, some loans may have a higher cap. Additionally, some loans may have a lifetime adjustment cap for decreases that is different than that of increases, known as a floor.
Tip
Compare rate caps when comparing ARMs. Two different lenders may have the same initial interest rate but offer different rate caps. Even if you think you’ll move or refinance before the adjustable period starts, it’s a good idea to know how much your rate can change.
Ask the lender to calculate the highest payment you may ever have to pay on the loan you are considering. You can also find this information on your Loan Estimate or Truth-in-Lending disclosure, which lenders are required to provide you within three business days after you apply for a loan.
If you’re behind on your mortgage, or having a hard time making payments, contact you current loan servicer or you can call the CFPB at (855) 411-CFPB (2372) to be connected to a HUD-approved housing counselor today. You can also use the CFPB's "Find a Counselor" tool to get a list of U.S. Department of Housing and Urban Development (HUD)-approved counseling agencies in your area.
If you have a problem with your mortgage, you can submit a complaint to the CFPB online or by calling (855) 411-CFPB (2372).
For an adjustable-rate mortgage (ARM), what are the index and margin, and how do they work?
For an adjustable-rate mortgage, the index is an interest rate that fluctuates periodically based on general market conditions. The margin is a number set by your lender when you apply for your loan. When your initial teaser rate expires, the index and margin are added together to become your new interest rate, subject to any rate caps.
With an adjustable-rate mortgage, the initial teaser rate is generally only for the first few years, and then it begins to adjust periodically. Once the rate begins to adjust, the changes to your interest rate (and payments) are based on the market, not your personal financial situation.
To calculate your new interest rate when it’s time for it to adjust, lenders use two numbers: the index and the margin.
Tip
You should pay attention to the margin when you’re shopping for your loan because it can vary a lot between different lenders. You can also negotiate the margin just like you would negotiate the rate on a fixed-rate loan.
Index + Margin = Your Interest Rate (subject to any rate caps)
The index is an interest rate that fluctuates with general market conditions. Changes in the index, along with your loan’s margin, determine the changes to the interest rate and your payments for an adjustable-rate mortgage loan. If interest rates go up, your payments will go up, so these loans have future risks that other loans do not. The lender decides which index your loan will use when you apply for the loan, and this choice generally won’t change after closing.
The margin is the number of percentage points added to the index by the mortgage lender to set your interest rate on an adjustable-rate mortgage (ARM) after the initial rate period ends. The margin is set in your loan agreement and won't change after closing. The margin amount depends on the particular lender and loan.
The fully indexed rate is equal to the margin plus the index.
Margins and indexes are two of many terms that determine your monthly payment for an adjustable-rate mortgage. It’s also important to understand caps, carryover, and other terms. If you’re considering an adjustable rate mortgage, read the Consumer Handbook on Adjustable Rate Mortgages (CHARM) booklet .
What is the difference between a fixed-rate and adjustable-rate mortgage (ARM) loan?
With a fixed-rate mortgage, the interest rate is set when you take out the loan and will not change. With an adjustable-rate mortgage, the interest rate may go up or down.
Tip
Don't assume you'll be able to sell your home or refinance your loan before the rate changes. The value of your property could decline, or your financial condition could change. If you can't afford the higher payments on today's income, you may want to consider another loan.
Many ARMs will start at a lower interest rate than fixed-rate mortgages. This initial rate may stay the same for months, one year, or a few years. When this introductory period is over, your interest rate will change on a regular interval, and the amount of your payment is likely to go up.
Part of the interest rate you pay will be tied to a broader measure of interest rates, called an index. Your payment goes up when this index of interest rates increases. When interest rates decline, sometimes your payment may go down, but that is not true for all ARMs. Some ARMs set a cap on how high your interest rate can increase at any time or over the life of the loan. Some ARMs also limit how much your interest rate may decrease at any time or over the life of the loan. The caps may be different for the initial change versus the subsequent regular interval changes. Your actual rate and the time of change will be based on the new index plus a set margin, subject to any caps. The margin is a number of percentage points added to the index by the lender that sets your interest rate.
Know how your ARM adjusts. Before taking out an adjustable-rate mortgage, find out:
How high or low your interest rate and monthly payments can go with each adjustment
How frequently your interest rate will adjust
How soon your payment could go up
If there is a cap on how high your interest rate could go
If there is a limit on how low your interest rate could go
If you will still be able to afford the loan if the rate and payment go up to the maximums allowed under the loan contract
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