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Simple English definitions for legal terms
adjustable rate mortgage (ARM)
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A quick definition of adjustable rate mortgage (ARM):
An adjustable rate mortgage (ARM) is a type of home loan where the interest rate can change over time. Unlike a fixed rate mortgage where the interest rate stays the same for the entire loan, an ARM has a fixed interest rate for a certain period of time, then the interest rate can go up or down based on a benchmark rate. This can make the monthly payments go up or down too. Some people choose ARMs because they can have lower interest rates at the beginning, but they can also become more expensive over time.
A more thorough explanation:
An adjustable rate mortgage (ARM) is a type of home loan where the interest rate can change over time. This is different from a fixed rate mortgage, where the interest rate stays the same for the entire loan term.
ARMs come in different types, but the most common one has a fixed interest rate for a certain period of time, usually 5 or 7 years. After that, the interest rate can change every year based on a benchmark rate, like the Secured Overnight Financing Rate (SOFR), plus a margin. For example, if the benchmark rate is 3% and the margin is 2%, the new interest rate would be 5%.
ARMs can be attractive because they often have lower interest rates than fixed rate mortgages in the beginning. However, the interest rate can go up over time, which means your monthly payments could increase. There are also caps on how much the interest rate can increase each year or over the life of the loan.
For example, a 5/1 ARM means the interest rate is fixed for the first 5 years, and then can change every year after that. A 7/1 ARM means the interest rate is fixed for the first 7 years, and then can change every year after that.
It's important to understand the terms of an ARM before deciding if it's the right type of mortgage for you.