A mortgage with an interest rate that changes periodically based on a market index.
An adjustable-rate mortgage (ARM) starts with a low introductory interest rate (called the "teaser rate") that remains fixed for a set period, typically 3, 5, 7, or 10 years. After this period, the rate adjusts periodically—usually annually—based on a specific index plus the lender's margin. ARMs often have annual and lifetime interest rate caps that limit how much the rate can increase per adjustment and overall. While ARMs can offer lower initial payments, they carry the risk of significantly higher payments when rates reset, making them suitable mainly for borrowers planning to sell or refinance before rates adjust.