How it Works
Adjustable Rate Mortgages
An Adjustable-Rate Mortgage (ARM) differs from a traditional fixed-rate loan by offering a “hybrid” structure. It provides a stable introductory period followed by periodic adjustments based on current market conditions.
Fixed-Rate Period
Most ARMs begin with a “teaser” or introductory period (typically 3, 5, 7, or 10 years) where your interest rate remains significantly lower than a standard 30-year fixed mortgage.
The Adjustment Phase
Once the initial period ends, the rate adjusts at set intervals. This new rate is calculated by adding a pre-determined margin to a specific financial index (such as the SOFR).
Rate Caps for Protection
To provide a safety net, ARMs include “caps” that limit how much your interest rate can increase during a single adjustment period and over the entire life of the loan.
Ideal for Transition
This product is often preferred by homeowners who plan to sell or refinance before the initial fixed-rate period expires, allowing them to benefit from the lower payments without being impacted by later adjustments.