Glossary

What Is an Adjustable-Rate Mortgage (ARM)?

An adjustable-rate mortgage (ARM) is a home loan with an interest rate that changes periodically based on a reference index, causing payments to rise or fall over time after an initial fixed period.

Luca Moschini

— 2 min read
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Definition

An adjustable-rate mortgage (ARM) is a mortgage loan whose interest rate adjusts at regular intervals based on changes in a specified market index. The rate is calculated using the index plus a fixed margin set by the lender.

ARMs typically begin with a lower initial interest rate than fixed-rate mortgages, after which the rate may increase or decrease depending on market conditions.

How It Works

An ARM usually starts with an initial period during which the interest rate is fixed. After this period ends, the interest rate adjusts periodically according to a reference rate, such as prime, LIBOR, SOFR, or short-term U.S. Treasury rates, plus a fixed margin.

As the reference rate changes, the mortgage interest rate and monthly payment may change. While the index fluctuates over time, the margin remains constant for the life of the loan.

Why the Term Matters

Adjustable-rate mortgages affect how borrowing costs change over time for homeowners. Understanding ARMs helps explain why mortgage payments may vary and how interest rate movements influence housing-related debt.

They also provide context for differences between variable-rate and fixed-rate lending structures.

  • Fixed-rate mortgage
  • Mortgage margin
  • Interest rate index
  • Hybrid ARM
  • Interest-only mortgage
  • Negative amortization

FAQs

What is an adjustable-rate mortgage (ARM)?
An adjustable-rate mortgage is a home loan with an interest rate that changes periodically based on a market index.

How are ARM interest rates determined?
ARM interest rates are determined by adding a fixed margin to a reference index such as prime, LIBOR, SOFR, or short-term U.S. Treasury rates.

Do ARM payments change over time?
Yes, ARM payments may change after the initial fixed-rate period as interest rates adjust.

What types of adjustable-rate mortgages exist?
Common types include hybrid ARMs, interest-only ARMs, and payment option ARMs.

How does an ARM differ from a fixed-rate mortgage?
An ARM has an interest rate that can change over time, while a fixed-rate mortgage maintains the same rate for the loan’s entire term.

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