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Adjustable-Rate Mortgage (ARM)

An adjustable rate mortgage has an interest rate that is fixed for an initial period, followed by an adjustable rate that may go up or down. 

Features

  • With an adjustable-rate mortgage, your interest rate and monthly principal and interest (P&I) payments remain the same for a defined initial period, then adjust annually when that initial period is over. 
  • Loans available in a variety of longer terms. 
  • Includes an interest rate cap that sets a limit on how high or low your interest rate can go. 

Benefits 

  • Typically an adjustable-rate mortgage has a lower initial interest rate than a fixed-rate mortgage. 
  • The interest rate cap limits the maximum amount your P&I payment may increase or decrease at each interest rate adjustment and over the life of the loan. 
  • May provide flexibility if you expect future income growth or if you plan to move or refinance within a few years.

Considerations

  • Monthly principal and interest payments may increase or decrease when the interest rate adjusts. 
  • Your monthly principal and interest payments may change every year after the initial fixed period is over.


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Principal and interest (P&I)
The 2 main components of your monthly payment. The principal portion reduces your loan balance, while the interest is your cost for using the principal. Your monthly payments may include taxes and insurance in addition to P&I.

Interest-rate cap
A limit on the amount your interest rate can increase or decrease. Periodic caps limit the increase or decrease from 1 adjustment period to the next. Lifetime caps limit the increase or decrease over the life of the loan.