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Adjustable Rate Mortgage education

Defining adjustable-rate mortgage

An adjustable-rate mortgage鈥攁lso known as an ARM or variable-rate mortgage鈥攊s a home loan where the interest rate changes throughout the life of the loan.

Naming an ARM

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.

What to expect as an ARM loan holder

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

How interest rates affect payments

The initial interest rate 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鈥檚 more common for them to increase after the initial interest period, resulting in a higher monthly payment.

Calculating interest rates

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.