"Introductory period: The initial fixed-rate phase before adjustments begin. Adjustment period: How frequently the rate can change after the intro period ends. Index: The benchmark interest rate used to calculate future rate changes. Margin: The lender's fixed markup added to the index. Initial cap: Limits how much the rate can increase at the first adjustment. Periodic cap: Limits how much the rate can change at each adjustment. Lifetime cap: The maximum interest rate allowed over the entire loan term."
"Simple example timeline: Years 1-5: Rate is fixed at 6.00% Year 6: Rate adjusts based on the index + margin Years 7-30: Rate continues adjusting annually, subject to caps Why this matters for first-time buyers: The longer the fixed period, the more predictable your payments are-but the initial rate may be slightly higher. Shorter fixed periods can offer lower starting rates but come with greater risk if plans change."
An adjustable-rate mortgage (ARM) combines an initial fixed-rate period with later adjustments tied to an index plus a lender margin. Key terms include the introductory period, adjustment period, index, margin, and caps (initial, periodic, lifetime) that limit rate changes and reduce payment shock. Common ARM structures like 5/1, 7/1, and 10/1 specify the fixed years followed by annual adjustments. ARMs can provide lower starting rates and improved short-term affordability but increase exposure to future payment variability. Choosing an ARM depends on how long a buyer plans to stay, budget flexibility, and comfort with rate risk.
Read at Redfin | Real Estate Tips for Home Buying, Selling & More
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