An Adjustable Rate Mortgage (ARM) is a loan in which the interest rate, and thus the monthly payments, are subject to change over the term of the loan. These changes usually occur yearly, but could be as seldom as every 3-5 years, depending on your loan terms. Some ARM products “mix” a fixed-rate and adjustable rate in the loan term. An example of this is the 5/1 ARM, where the loan has a fixed rate for the first five years (initial period) and then can vary each year after the initial period based on a specific interest rate index, plus an additional amount (margin) until the loan is paid off.
There are two types of caps that can be used to limit the amount that an interest rate can change. One example is a periodic cap that limits the interest rate increase or decrease from one adjustment period to the next. The second example is a lifetime cap, which limits the interest rate increase or decrease over the life of the loan. All dwelling-secured consumer ARM loans have a lifetime limit on the interest rate increase. ARM loans may also have a floor rate, meaning the lowest rate that can apply at any time.
For more information on adjustable rate mortgages:
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More information on ARM loans can be found in the booklet title "Consumer Handbook on Adjustable-Rate Mortgage" published by the CFPB.Download this CFPB Booklet.