Adjustable-Rate Mortgage

Banking & Credit

An adjustable-rate mortgage (ARM) starts with a fixed introductory rate (typically 5, 7, or 10 years), then adjusts annually based on an index (SOFR replaced LIBOR) plus a margin. ARM rates are usually 0.5-1% below fixed-rate equivalents during the introductory period — meaningful savings. After the intro period, rates can rise rapidly. ARMs make sense for buyers planning to sell or refinance within the fixed period, expected to be earning significantly more in the future, or in declining-rate environments. The 2008 financial crisis was partly fueled by borrowers who didn't understand their ARM resets.