Mortgage

Adjustable-Rate Mortgage (ARM) A home loan with a fixed starter rate that later moves up or down with the market

Priya Shah By Priya Shah, Senior Mortgage Editor · Updated 2026-06-09
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An adjustable-rate mortgage (ARM) is a home loan that starts with a fixed introductory rate for a set period, then adjusts periodically based on an index plus a margin. With a common 5/1 ARM, your rate stays fixed for the first five years and then can reset every year afterward. The new rate is calculated by adding the lender's fixed margin to a moving index, so your payment can rise after the fixed period ends. ARMs include caps that limit how much the rate can change at each adjustment and over the life of the loan, which provides some protection against sharp jumps. ARMs often start with lower payments than fixed-rate loans, but the trade-off is uncertainty once the introductory term expires. How much your rate moves depends on the specific index, margin, and caps in your contract.
Also Known As
ARM Variable-Rate Mortgage 5/1 ARM Hybrid ARM
Used in Context
  1. A buyer planning to sell within five years chose a 5/1 ARM to lock in a lower introductory rate before the adjustment period kicks in.
  2. After the fixed period ended, the homeowner's payment rose when the index moved higher, though the rate cap kept the increase within contractual limits.
  3. Borrowers comparing loan structures through Dreamy Leads often weigh an ARM's lower starter rate against the payment uncertainty that follows.
Related Terms
Mortgage Fixed-Rate Mortgage A home loan with one locked interest rate for the whole term Mortgage Annual Percentage Rate (APR) The yearly cost of your mortgage including fees, not just the interest rate Mortgage Rate Lock A lender promise to hold your quoted rate while your loan closes Mortgage Amortization The schedule that shows how each loan payment splits between principal and interest over time Mortgage Mortgage Insurance Premium (MIP) The mortgage insurance you pay on an FHA loan to protect the lender if you default
Frequently Asked Questions

What does the 5/1 in a 5/1 ARM mean?

The first number is how many years your rate stays fixed, and the second is how often it adjusts afterward. With a 5/1 ARM, your rate is fixed for five years, then can reset once each year based on the index plus the lender's margin.

Can my payment go up with an ARM?

Yes. After the fixed introductory period ends, the rate adjusts periodically using an index plus a margin, so your payment can rise. ARMs include caps that limit how much the rate can change at each adjustment and over the life of the loan.

How is an ARM rate calculated after the fixed period?

Your new rate equals a market index plus a fixed margin set in your contract. The index moves with the market while the margin stays constant. Caps then limit how far the rate can climb, so the exact result depends on your loan's specific terms.

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