Adjustable-Rate Mortgage (ARM)
An adjustable-rate mortgage has an interest rate that's fixed for an initial period — often 5, 7, or 10 years — then adjusts periodically with the market. It usually starts lower than a fixed-rate loan, trading a cheaper early payment for uncertainty later.
A “5/1 ARM” is fixed for five years, then adjusts annually; a 7/6 is fixed for seven and adjusts every six months. After the fixed period the rate becomes a market index plus a margin set in your contract — the index moves on its own, but the margin is yours for the life of the loan and is worth comparing between lenders. Caps limit the damage and are usually written as three numbers, such as 2/2/5: the maximum rise at the first adjustment, at each later one, and over the loan's life. Those caps make the worst case knowable in advance, and calculating that payment before signing is the only honest way to judge an ARM.
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