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ARM
(Adjustable-Rate Mortgage)
An ARM (Adjustable-Rate Mortgage) is a home loan with an interest rate that fluctuates after an initial fixed period (e.g., 5/1 ARM: 5 years fixed, then adjusts annually). Rates are tied to indexes like SOFR plus a lender’s margin.
ARMs often start with lower rates than FRMs, saving money for short-term owners, but risk payment shocks if rates rise. Caps limit annual (e.g., 2%) and lifetime (e.g., 5%) increases. The CFPB warns ARMs require financial flexibility; during the 2008 crisis, many borrowers faced defaults when rates reset. Ideal for those planning to sell or refinance before adjustment.
ARMs often start with lower rates than FRMs, saving money for short-term owners, but risk payment shocks if rates rise. Caps limit annual (e.g., 2%) and lifetime (e.g., 5%) increases. The CFPB warns ARMs require financial flexibility; during the 2008 crisis, many borrowers faced defaults when rates reset. Ideal for those planning to sell or refinance before adjustment.