Definition
Adjustable Rate Mortgage with initial fixed rate period then adjusting periodically, typically lower initial rates than fixed.
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ARMs offer lower starting rates (7/1 ARM: 7 years fixed, then adjusts annually). Rate risk increases after fixed period. ARMs are risky if rates surge; suitable only for short-term ownership. Fixed-rate mortgages are generally safer.
Pro Tip
Avoid ARM loans unless certain you'll sell before rate adjustment; rate risk outweighs modest initial savings.
Example
7/1 ARM at 5% for 7 years; rate adjusts to 6% year 8, potentially rising higher with rate environment