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. For most Michigan buyers planning to stay put, a fixed-rate loan removes a gamble that rarely pays off enough to justify the risk.
Common questions
What does 5/1 or 7/1 mean on an ARM?
The first number is the fixed period in years (5 or 7); the second is how often the rate adjusts after that (annually). So a 5/1 ARM is fixed five years, then resets each year.
Are ARMs risky?
They carry rate risk: if you hold past the fixed period into rising rates, the payment climbs. They reward borrowers who sell or refinance before the first reset.
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