Typically, an ARM comes with these basic features: Initial interest rate: This is the beginning interest rate on the ARM. It is often a fixed percentage rate for a period of time. In the case of the 5/1 ARM, this initial interest rate is fixed for a period of five years and then it enters into the adjustment period. Adjustment period: This is the length of time that the interest rate is to remain unchanged. For example, in the case of a 5/1 ARM the initial adjustment period is five years and then adjusts once per year for 25 years until the loan is paid off. At the end of each period the rate is reset and the monthly loan payment is recalculated. Index rate: Most ARMs are tied to an “index rate.” This is a benchmark by which they determine what the new rate will be adjusted to at the end of each adjustment period. The most common index used for mortgages is the Secured Overnight Financing Rate (SOFR). Margin: This is the percentage points added to the index rate to determine the ARM’s interest rate during the adjustable period. For example, if the current index rate is 2.0% and the ARM has a 2.75 margin, the rate during the adjustment period would be 4.75% (index + margin). Interest rate cap: Typically, ARMs have limits on how much interest rates can change at any adjustment period or over the life of the loan (often both). Caps are expressed as "initial adjustment cap/periodic adjustment cap/lifetime cap." An ARM with 2/1/5 caps can't rise or fall more than 2% at first adjustment, 1% each subsequent adjustment or 5% at any time during the life of the loan. Caps are an important risk mitigating factor to closely review if you consider an ARM.