Key takeaways
- An adjustable-rate mortgage has an initial fixed period, then adjusts periodically based on an index plus a margin. Adjustable-rate basics
- An ARM can suit borrowers who expect to sell or refinance before the first adjustment, or who can comfortably absorb higher payments. When an ARM may fit
- The Loan Estimate for an ARM shows the most the payment could become and when. Reading the disclosures
Fixed-rate basics
A fixed-rate mortgage keeps the same interest rate for the life of the loan, so principal and interest stay the same. Taxes and insurance can still change. Predictability is the main benefit.
Adjustable-rate basics
An adjustable-rate mortgage has an initial fixed period, then adjusts periodically based on an index plus a margin. Caps limit how much the rate can change at each adjustment and over the life of the loan.
When an ARM may fit
An ARM can suit borrowers who expect to sell or refinance before the first adjustment, or who can comfortably absorb higher payments. It carries the risk that rates will be higher when it adjusts.
Reading the disclosures
The Loan Estimate for an ARM shows the most the payment could become and when. The Adjustable Interest Rate table on page 2 lists the index, margin and caps.
Questions to ask
How long is the initial period? What index is used? What are the caps? What is the maximum payment? Can I afford it? What happens if I cannot refinance?
Official guidance
The CFPB's consumer handbook on adjustable-rate mortgages explains these terms in detail.
Hybrid choices
Between the two sit hybrid ARMs with long initial fixed periods, such as seven or ten years. They can lower early costs for borrowers with a clear time horizon, but the risk returns when the fixed period ends.
Sources
Sources reviewed . General education only; confirm current rules with official sources and a licensed lender.