Adjustable-Rate Mortgage (ARM)

An ARM holds a fixed rate for an introductory stretch — five, seven, or ten years is typical — and then resets on a schedule for the rest of the term. A 5/6 ARM, for instance, is fixed for five years and then adjusts every six months.

After the fixed period the rate is rebuilt from two pieces: a published benchmark index that moves with the market, plus a fixed margin the lender set at origination. The margin never changes; the index is what makes your payment uncertain.

Caps are the guardrails and are worth reading before signing. Lenders set a limit on the first adjustment, a limit on each subsequent one, and a lifetime ceiling above the starting rate. A loan advertised as safe because it is capped can still be several points more expensive than where it began.

The opening rate is usually lower than a comparable fixed-rate mortgage, which is the entire appeal. That discount is genuine value if you are confident you will sell or refinance before the fixed period ends, and a gamble if you are not — refinancing depends on rates, your credit, and your home's value all cooperating years from now.

Modern ARMs are far tamer than the option ARMs that fed the 2008 crisis, since federal rules now bar negative amortization on most home loans. The payment shock risk remains real; the runaway balance risk largely does not.