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Defining adjustable-rate mortgage

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An adjustable-rate mortgage—also known as an ARM or variable-rate mortgage—is a home loan where the interest rate (The annual cost to borrow money for your mortgage. The rate is expressed as a percentage of your total loan balance and is paid on a monthly basis, along with your principal payment, until your loan is paid off) changes throughout the life of the loan.

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Naming an ARM

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ARM loans are typically named with two numbers such as a 7/1 ARM. The first number is how long the initial interest rate lasts. The second number is how often the rate will change after that. For example, in a 7/1 ARM, the interest rate is fixed for the first 7 years, then adjusts every year for the remainder of the loan.

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What to expect as an ARM loan holder

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After the fixed interest rate period ends, your interest rate will change. We’ll notify you before your interest rate adjusts, and again before your payment changes.

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HowÌýinterest rates affect payments

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The initial interest rate (The period of time at the beginning of an ARM mortgage when the interest rate will not change.) is fixed for a period of time, then adjusts at regular intervals. When the interest rate on a loan changes, the payment changes as well. While interest rates could decrease, it’s more common for them to increase after the initial interest period, resulting in a higher monthly payment.

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Calculating interest rates

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The total interest rate on an ARM loan is based on Index and Margin. The index is a benchmark interest rate that reflects general market conditions, and the margin is the number of percentage points added to the index.

Index + Margin = your interest rate.