Loan types
ARM (Adjustable-Rate Mortgage)
A mortgage with a rate fixed for an initial period that then adjusts periodically based on an index plus a margin, within set caps — often starting below a comparable fixed rate.
What does ARM mean?
An ARM opens with a fixed teaser period — five years on a 5/1, seven on a 7/1 — usually at a lower rate than a fixed loan. After that the rate resets on a schedule to an index plus a fixed margin, bounded by initial, periodic and lifetime caps.
It rewards borrowers who sell or refinance before the first reset and punishes those who hold through rising rates.
How the caps work
- Initial cap: limits how much the rate can jump at the first reset
- Periodic cap: limits each adjustment after that
- Lifetime cap: sets the ceiling the rate can never exceed
On a $285,000 loan, a lower ARM start rate might trim the early payment versus a fixed loan. The catch is that once the fixed period ends, the payment can climb to that lifetime cap if rates have risen.
Common questions
Why choose an ARM over a fixed loan?
The initial rate is usually lower, so an ARM can save money for someone certain they'll move within the fixed window. For long-term Michigan owners, a fixed loan is generally safer.
Related terms