Adjustable-Rate Mortgage (ARM) — Financial Glossary

Definition: A mortgage where the interest rate can change periodically after an initial fixed-rate period.

What is an ARM?

An adjustable-rate mortgage (ARM) starts with a fixed interest rate for an initial period (commonly 5, 7, or 10 years), then adjusts periodically based on a market index. A "5/1 ARM" means the rate is fixed for 5 years, then adjusts once per year.

Pros and cons

Pros: Lower initial rate means lower initial payments. Good if you plan to sell or refinance before the adjustment period.

Cons: Payments can increase significantly after the fixed period ends. Harder to budget long-term.