Adjustable-Rate Mortgage (ARM) Loans: What You Need to Know
When it comes to financing a home, one size doesn’t fit all—and that’s where an Adjustable-Rate Mortgage (ARM) can be a smart option. Whether you’re planning to stay in your home for just a few years or believe interest rates will decrease in the future, an ARM loan with Sirva Mortgage offers flexibility and potential savings compared to a traditional fixed-rate mortgage.
What is an Adjustable-Rate Mortgage (ARM)?
An ARM loan is a type of mortgage that starts with a fixed interest rate for an initial period (typically 5, 7, or 10 years), after which the rate adjusts annually based on market conditions. This means your monthly payment could increase or decrease after the fixed period, depending on the interest rate environment at that time.
Is an ARM Loan Right for You?
An ARM may be a great choice if:
However, if long-term stability and predictable payments are your top priorities, a fixed-rate mortgage may be a better fit.
How ARMs Work
ARMs are structured with two key timeframes:
Introductory Fixed-Rate Period
During the first few years of your loan, your interest rate remains the same, providing predictable payments.
Adjustment Period
Once the fixed period ends, your interest rate adjusts annually based on a predetermined index and margin—which means your monthly mortgage payment may change.
Common ARM Loan Terms
ARM loans are often written as X/1 ARMs, where:
- X = The number of years your interest rate stays fixed.
- 1 = How often the rate adjusts (once per year after the fixed period).
After the fixed-rate period, your monthly payment may change each year, but ARMs include built-in rate caps to limit how much the interest rate can increase during any given adjustment period or over the life of the loan.
| ARM Type | Fixed-Rate Period | Adjustment Period | Total Loan Term |
|---|---|---|---|
| 5/1 ARM | Fixed for 5 years | Adjust annually for 25 years | 30 years |
| 7/1 ARM | Fixed for 7 years | Adjust annually for 23 years | 30 years |
| 10/1 ARM | Fixed for 10 years | Adjust annually for 20 years | 30 years |
| ARM Type | 5/1 ARM |
| Fixed Rate | 5 Years |
| Adjustment | Annually 25 years |
| Loan Term | 30 years |
| ARM Type | 7/1 ARM |
| Fixed Rate | 7 Years |
| Adjustment | Annually 23 years |
| Loan Term | 30 years |
| ARM Type | 10/1 ARM |
| Fixed Rate | 10 Years |
| Adjustment | Annually 20 years |
| Loan Term | 30 years |
How Do ARM Adjustments Work?
Once the fixed-rate period ends, your new interest rate is calculated based on:
- Index – A benchmark rate (such as the SOFR or Treasury Index) that reflects market interest rate trends.
- Margin – A set percentage added to the index by the lender.
- Rate Caps – Limits on how much your interest rate can increase per year and over the life of the loan.
