Adjustable-Rate Mortgage (ARM) Explained Simply: Pros, Cons, and Buyer Tips

Isaac Robles
Sep 4
4 min read

When shopping for a home loan, one option you’ll come across is the adjustable-rate mortgage (ARM). Unlike a fixed-rate mortgage where the interest rate never changes, an ARM begins with a lower introductory rate for a set period, and then adjusts at regular intervals based on market conditions.

This lower initial rate often makes ARMs appealing because they start out more affordable, which can open the door to buying a bigger home or enjoying smaller payments in the early years. However, once the fixed period ends, the rate can move up or down... bringing both opportunity and risk.

In this article, we’ll break down what an ARM is, why lenders offer them, how the adjustments work, and what kinds of buyers might benefit most from choosing this type of loan.

Three piggy banks, one holding dollar bills, sit on a dark wooden surface with scattered coins. Background is a plain light wall. — An ARM loan's appeal is that it allows more money to stay in the buyer's piggybank for the first few years of home ownership

What Is an Adjustable-Rate Mortgage?

An adjustable-rate mortgage (ARM) is a home loan where the interest rate doesn’t stay the same forever.

It starts low and steady for a few years... but then it can change.

Most ARMs give you a fixed, lower interest rate for the first 5, 7, or 10 years.

After that, the rate is checked every 6 or 12 months, and can go up or down depending on the market and your lender’s rules.

Example: A 5/1 ARM means your rate is fixed for the first 5 years, and after that it can change once per year. Think of it like getting a “starter deal” on your loan. It’s cheaper at first, but it may not stay that way forever.

How Do ARMs Work?

Initial Rate Period: You lock in a fixed, often lower-than-average rate for a set number of years.
Adjustment Period: After that, your interest rate can go up or down depending on the index it’s tied to. The "index" is like a measuring stick that follows what the economy is doing. If it says rates are rising, your mortgage rate may rise too. But if they fall, your rate may drop.
Caps: Most ARMs include rate caps that limit how much your rate can increase at each adjustment and over the life of the loan.

Example:

Loan: $300,000, 5/1 ARM.
First 5 years: 5% fixed interest rate.
After 5 years: Rate adjusts annually based on market index + lender’s margin.
If the index rises by 1% at year 6, your new rate could be 6%, raising your monthly payment by a few hundred dollars.

Popular Types of ARMs

The most common ARMs are named with two numbers, like 5/1, 7/1, or 10/1. The first number shows how long the interest rate stays fixed at the start, and the second shows how often the rate can change afterward.

5/1 ARM: Fixed rate for 5 years, then adjusts once per year.
7/1 ARM: Fixed rate for 7 years, then adjusts once per year.
10/1 ARM: Fixed rate for 10 years, then adjusts once per year.

Pros and Cons of an Adjustable-Rate Mortgage

Pros	Cons
Lower Initial Rates (which means lower monthly payments early on)	Uncertainty in later payments. Rates can rise after the fixed period.
Short-Term Savings (great if you don’t plan to stay in the home long term)	Budgeting Challenges Harder to plan long term if you’re not sure what your future payments will be.
Potential to Benefit if Rates Drop – If rates fall, your payments may decrease after the adjustment period.	Market Risk – If rates climb, you may end up paying more than you would with a fixed-rate loan.

When Does an ARM Make Sense?

An ARM can work well for:

First-time buyers who want lower payments now and plan to upgrade homes later.
Short-term homeowners who expect to move before the fixed period ends.
Investors who want to free up cash flow early in the loan.

If you plan to stay in the home for the long haul, however, a fixed-rate mortgage often provides more peace of mind.

Expert tip: If you’re unsure whether an ARM or fixed-rate loan is better for your budget, I can help run side-by-side comparisons so you know the numbers before deciding.

Adjustable-Rate Mortgage Explained: Final Thoughts

Topic	Key Takeaway
What is an ARM?	A home loan with a rate that changes after an initial fixed period
How it Works	Starts fixed, then adjusts based on market index + margin
Pros	Lower starting rate, short-term savings, possible benefit if rates drop
Cons	Payments can rise, harder to budget, risk if rates increase
Best For	Buyers planning to move or refinance within the fixed period

An adjustable-rate mortgage (ARM) can be a smart choice for the right buyer. But it’s not for everyone. Always weigh the short-term savings against the long-term risks.

If you’re considering an ARM, ask your lender to show you side-by-side comparisons with fixed-rate loans.

As Wisconsin’s housing expert, I can help you review mortgage options, run the numbers, and connect you with trusted lenders so you can make the best decision for your future. I hope you feel I explained how adjustable-rate mortgages work in a simple and transparent manner. Contact me today and let's get started on your home buying journey.