An adjustable-rate mortgage (ARM) refers to a type of home loan with a variable rate. With an ARM, the initial interest rate is fixed for a period of time. After that, the interest rate applied on the outstanding balance resets periodically. The interest rate for an ARM is typically tied to performances of a specific benchmark (e.g., US Treasury Rate, Secured Overnight Financing Rate. As the index rate changes, the interest rate on the ARM adjusts accordingly.  Key features of adjustable-rate mortgages: Initial Fixed-Rate Period: ARMs often start with an initial fixed-rate period, typically ranging from one to ten years. During this period the interest rate remains fixed. Interest Rate Adjustments: After the initial fixed rate period, the interest rate on an ARM can adjust periodically. The adjustments frequency varies, but common intervals include annually, semi-annually, or monthly. When the adjustment occurs the interest rate is recalculated based on the current index rate, along with a predetermined margin or spread set by the lender. Index and Margin: The interest rate is based on the performance of a specific financial index. The lender adds a margin to the index rate to determine the new interest rate. For example, if the index rate is 3% and the margin is 2%, the new interest rate would be 5%. Rate Caps and Limits: To protect borrowers from dramatic interest rate fluctuations, ARMs typically have rate caps. Rate caps set limits on how much the interest rate can increase or decrease during a specific time or over the life of the loan.  Potential for Rate Increases and Decreases: ARMS exposes borrowers to potential interest rate changes. If market interest rates rise, the interest rate on the ARM will increase, resulting in higher monthly payments. Conversely, if rates decrease, the interest rate and monthly payments may go down as well.