An ARM (Adjustable-Rate Mortgage) typically starts with a lower rate than a comparable fixed-rate loan. After the fixed period (commonly 5, 7, or 10 years), the rate adjusts annually based on a benchmark like SOFR plus a margin.

ARMs are described as X/Y, e.g., a 7/1 ARM has a 7-year fixed period followed by yearly adjustments. Each adjustment is constrained by rate caps: an initial cap (first adjustment), a periodic cap (each subsequent adjustment), and a lifetime cap (max increase from the start).

ARMs make sense if you plan to sell or refinance before the fixed period ends. If rates rise sharply during the adjustable period, your payment can climb substantially.