Adjustable-rate mortgage (ARM).

In plain English

An adjustable-rate mortgage starts with a fixed interest rate for an initial period, commonly 5, 7, or 10 years, and then adjusts at set intervals (usually annually) based on a benchmark index plus a margin. ARMs are typically described as '5/1', '7/1', or '10/1', meaning the rate is fixed for 5/7/10 years, then adjusts every 1 year after. They have rate caps that limit how much the rate can rise per adjustment and over the life of the loan.

01Why it matters

ARMs typically offer a lower initial rate than fixed-rate mortgages, which makes them attractive when rates are high or when you don't plan to keep the loan past the fixed period. They become risky when rates rise after the fixed period ends, your payment can jump significantly. Buyers who plan to sell or refinance within 5-7 years sometimes use ARMs strategically; long-term homeowners usually take the predictability of a fixed rate.

02The math, step by step

A 7/1 ARM at 5.75% on $300,000 has a monthly payment of about $1,752 for the first 7 years. After year 7, the rate adjusts annually. If rates have risen and the new rate is 8%, the payment jumps to roughly $2,200, a $448/month increase that wasn't in the original budget. If rates fell, the payment would drop instead. The uncertainty is the trade-off.

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT