Definition
A mortgage whose rate is fixed for an intro period (commonly 5, 7, or 10 years) and then adjusts periodically with the market, within caps. The intro rate usually undercuts a 30-year fixed; the risk arrives at the first adjustment.
Why it matters
An ARM is a bet on your own timeline: cheaper if you sell or refinance before the adjustment, dangerous if you are still holding when rates have climbed. The caps (per-adjustment and lifetime) are the fine print that decides how bad the bad case can get.
Example
A 7/1 ARM starts a full point below the fixed alternative, saving roughly $250 a month on a $400,000 loan. A buyer certain they will relocate within five years pockets the savings; a forever-home buyer is gambling on where rates sit in year eight.
Related terms
This definition is educational, not financial, legal, or tax advice. U.S. rules and limits change; verify time-sensitive details with official sources. See our disclaimer.