Finance & MortgagesAbbreviation: ARM

Adjustable-Rate Mortgage (ARM)

A mortgage with an interest rate that changes periodically based on a financial index, usually after an initial fixed-rate period.

Abbreviation: ARM·Pronounced: “A-R-M”

Full Definition

An adjustable-rate mortgage (ARM) is a home loan with an interest rate that changes periodically after an initial fixed-rate period. The rate is tied to a financial index (such as SOFR, formerly LIBOR) plus a margin set by the lender. ARMs are described by two numbers — for example, a 5/1 ARM has a fixed rate for 5 years, then adjusts every 1 year. Caps limit how much the rate can increase: periodic caps limit each adjustment, while lifetime caps limit the total increase over the loan term. ARMs typically offer lower initial rates than fixed-rate mortgages, making them attractive when rates are high or when the borrower plans to sell or refinance before adjustments begin.

Real-World Example

A borrower takes a 7/1 ARM at 5.5%. The rate is fixed for 7 years, then adjusts annually. If the index rises, so does the payment — up to the cap limits.

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How Adjustable-Rate Mortgage (ARM) Appears on the Real Estate Exam

Common question types, tested concepts, and what to watch out for

Know the index + margin = fully indexed rate formula. Know the types of caps (initial, periodic, lifetime). Common exam scenario: a borrower taking an ARM to qualify for a larger loan they couldn't afford at fixed rates.

Related Terms

Amortization
The gradual repayment of a loan through scheduled periodic payments that cover both principal and interest.
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Loan-to-Value Ratio (LTV)(LTV)
The ratio of a mortgage loan amount to the appraised value or purchase price of a property, expressed as a percentage.
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Private Mortgage Insurance (PMI)(PMI)
Insurance required by lenders on conventional loans with less than 20% down payment, protecting the lender — not the borrower — against default.
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Deed of Trust
A security instrument used in many states instead of a mortgage, involving three parties: borrower (trustor), lender (beneficiary), and a neutral trustee.
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More Finance & Mortgages Terms

AmortizationLoan-to-Value Ratio (LTV)Debt-to-Income Ratio (DTI)Discount PointsView all →

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