Definition:
A fixed-period adjustable-rate mortgage (ARM) is a type of home loan that has a fixed interest rate for an initial period (usually 3, 5, 7, or 10 years), after which the rate adjusts periodically based on market conditions.
Example:
John gets a 5/1 ARM to buy his new home. His interest rate stays fixed for the first 5 years, helping him enjoy lower payments. After that, the rate adjusts once a year based on current market rates.
Explanation:
A fixed-period ARM gives borrowers the stability of a fixed rate for the first few years, followed by an adjustable rate that changes periodically. The format of the loan is often written as two numbers, like 5/1 or 7/1. The first number refers to the number of years the interest rate is fixed. The second number shows how often the rate will change after that period—usually once per year.
The adjusted rate is based on a financial index (like the SOFR or Treasury index) plus a set margin. While the initial rate is often lower than a traditional fixed-rate mortgage, it can increase significantly over time, depending on interest rate trends.
To protect borrowers, most ARMs have caps that limit how much the interest rate can increase per adjustment and over the life of the loan.
Why is Fixed-Period Adjustable-Rate Mortgage Important in Real Estate Transactions?
Fixed-period ARMs are important because they offer lower initial payments, which can help buyers afford more home upfront. They’re ideal for people who plan to move or refinance before the fixed period ends.
For sellers, buyers using ARMs may be more flexible with pricing or closing timelines. Understanding how these loans work helps all parties make better financial decisions and structure deals that fit long-term goals.