Adjustable-Rate Mortgage

An adjustable-rate mortgage (ARM) is a mortgage loan whose interest rate is adjusted periodically based on certain parameters

The 5-year and 7-year adjustable-rate mortgages are the most common although other terms are often available (from 3 to 10 years).

Interest rates and payments are typically lower than fixed-rate mortgages (FRMs)
Rate may decrease after the initial period
Typically allows borrowers to qualify for a larger loan
Great for homeowners who do not plan to live in the property longer than the initial term
Great for investors who plan to flip the property within a relatively short period
Free up money each month for living expenses or investments

Rate may increase after the initial period
Can be difficult to understand
Borrowers must refinance before the initial period expires to maintain a guaranteed rate
Could cost more in the long run if the loan is kept past the initial fixed period

Initial rate: The preliminary interest rate.
The adjustment period: The period in which the current rate will remain consistent.
The index rate: The future rate changes are based off a variety of indices such as the LIBOR.
The margin: The percentage which gets added to the index rate to determine the adjusted interest rate.
Interest rate cap: The percentage of change which can be added to or deducted from your current rate.
Ceiling: The highest interest rate permitted during the life of the loan.