ADJUSTABLE RATE MORTGAGE (ARM)
An adjustable rate mortgage (ARM) is an option where the interest rate and principle & interest payment start out fixed for a set period of time. Once that initial period ends, the interest rate and payment will adjust based on the index, margin, floor and ceiling.
The most popular options are 5/1, 7/1, and 10/1 ARM. The rate and P&I payment is fixed for the first 3, 5, or 7 years (depending on chosen term), and then adjusting annually thereafter.
Due to the interest rate adjustment, an ARM is considered a riskier loan option. However, it may be considered a good option for someone who is certain they will not have the loan longer than the initial fixed rate period. As such, and ARM will typically have a lower interest rate than a fixed rate mortgage.