## Adjustable-Rate Mortgage Overview
An adjustable-rate mortgage (ARM) is a type of loan in which the interest rate can change over time. This is in contrast to a fixed-rate mortgage, where the interest rate remains the same for the life of the loan.
ARMs are typically offered with a lower initial interest rate than fixed-rate mortgages. However, the interest rate on an ARM can increase or decrease over time, depending on the terms of the loan.
**How Do Adjustable-Rate Mortgages Work?**
ARMs are typically tied to an index, such as the prime rate or the LIBOR (London Interbank Offered Rate). The index is a benchmark interest rate that other interest rates are based on.
When the index increases, the interest rate on an ARM will also increase. When the index decreases, the interest rate on an ARM will also decrease.
The amount that the interest rate on an ARM can change is typically limited by the terms of the loan. For example, an ARM may have a “rate cap” that limits how much the rate can increase or decrease in a single year or over the life of the loan.
**Types of Adjustable-Rate Mortgages**
There are several different types of ARMs, including:
* **Hybrid ARMs:** These loans have a fixed interest rate for a certain period of time, such as 5 or 10 years. After the fixed-rate period expires, the interest rate becomes adjustable.
* **Convertible ARMs:** These loans allow you to convert the loan to a fixed-rate loan at a later date.
* **Interest-only ARMs:** These loans only require you to pay interest on the loan for a certain period of time, such as 5 or 10 years. After the interest-only period expires, you will have to begin paying principal and interest.
**Benefits of Adjustable-Rate Mortgages**
There are several potential benefits to adjustable-rate mortgages, including:
* **Lower initial interest rates:** ARMs typically have lower initial interest rates than fixed-rate mortgages. This can save you money on your monthly payments.
* **Potential for lower long-term interest rates:** If interest rates decline in the future, the interest rate on your ARM will also decline. This could save you money over the life of the loan.
**Risks of Adjustable-Rate Mortgages**
There are also several potential risks to adjustable-rate mortgages, including:
* **Interest rate increases:** If interest rates increase in the future, the interest rate on your ARM will also increase. This could make your monthly payments more expensive.
* **Uncertainty about future interest rates:** It is impossible to predict what interest rates will do in the future. This means that you could end up paying more in interest over the life of an ARM than you would with a fixed-rate mortgage.
**Is an Adjustable-Rate Mortgage Right for You?**
Whether or not an adjustable-rate mortgage is right for you depends on your individual circumstances. If you are comfortable with the potential risks of an ARM, and you believe that interest rates are likely to remain low or decline in the future, then an ARM could be a good option for you.
However, if you are not comfortable with the potential risks of an ARM, or if you believe that interest rates are likely to increase in the future, then a fixed-rate mortgage may be a better option for you.
## Statistics on Adjustable-Rate Mortgages
* According to the Mortgage Bankers Association, adjustable-rate mortgages accounted for 12% of all new mortgages in 2020.
* The average interest rate on a 5/1 ARM was 2.96% in 2020.
* The average interest rate on a 7/1 ARM was 3.12% in 2020.
* The average interest rate on a 10/1 ARM was 3.26% in 2020.
## Additional Resources
* [Adjustable-Rate Mortgages (ARMs)](https://www.consumerfinance.gov/ask-cfpb/what-are-adjustable-rate-mortgages-arms-en-204/)
* [Five Things to Know About Adjustable-Rate Mortgages](https://www.nerdwallet.com/article/mortgages/adjustable-rate-mortgage)
* [Adjustable Rate Mortgages (ARMs): A Guide](https://www.rocketmortgage.com/learn/adjustable-rate-mortgage)