Adjustable Rate Mortgage

3/1, 5/1 & 7/1 ARM

3/1 ARM

Monthly payments are based on a 30 year repayment schedule, and the interest rate stays fixed for the first three years. After that, the rate can change annually — the "adjustment period."

The new rate is based on a financial index plus a fixed "margin." For example, if the index equals 4.5% and the margin equals 2.50%, the new rate would be 7% — unless capped. If the adjustment cap is 2%, the new rate would be limited to 6.5%. A lifetime cap also limits how much the rate can move over the life of the loan. These loans can work well for people who plan to stay in their home short-term.

5/1 ARM

Same structure as the 3/1 ARM, except the rate stays fixed for the first five years.

7/1 ARM

Same structure as the 3/1 ARM, except the rate stays fixed for the first seven years.