Adjustable Rate Mortgage (ARM) Loan Program

7 year ARM, 5 year ARM, 3 year ARM, 1 year ARM, 7/1, 5/1, 3/1, 1/1

Adjustable Rate Mortgage (ARM) loans adjust based on the following factors:

  1. Index:
    The index of an ARM is the financial medium that the loan is "attached" to, or adjusted to. The most common indices, also known as indexes, are the LIBOR (London Interbank Offered Rate), 1-Year Treasury Security, 6-Month Certificate of Deposit (CD), Prime, and COFI (the 11th District Cost of Funds). Each of these indices moves up and down based on fluctuations in the financial markets.
  2. Margin:
    The margin is one of the most significant aspects of ARMs because it is added to the index to determine the interest rate that you pay. The margin added to the index is known as the fully indexed rate. For example, if the current index value is 4.250% and your loan has a margin of 2.0%, your fully indexed rate is 6.250%. Margins on loans range from 1.75% to 3.5% depending on the index and the amount of the loan.
  3. Payment Caps:
    Several loan programs have payment caps as a substitute for interest rate caps. These loan programs diminish payment shock in a rising interest rate market, but can also lead to deferred interest or "negative amortization".  Such loans normally cap your annual payment increases to 7.5% of the previous payment.
  4. Interim Caps:
    This limits how much the interest rate can change each time it is adjusted. The cap is usually between 1 and 2%.
  5. Lifetime Caps:
    Practically all ARMs have a maximum interest rate or lifetime interest rate cap. However, the lifetime cap varies with each lender and with different loan programs. Loans with low lifetime caps usually have higher margins.
  6. Annual Caps:
    This limits the increase in the interest rate during a calendar year adjustment period.  2% is a common annual cap for an ARM.           


  • ARMs allow you to have a lower interest rate and a lower monthly payment for a short period.
  • It is a great program if you want to sell the house before the fixed period ends.
  • Payments may go down after any fixed rate period if interest rates are lower.
  • You have the option to refinance if interest rates move lower.
  • Borrowers may qualify for a higher loan amount.


  • After the initial fixed rate period is over, your monthly payment would increase if interest rates are higher.
  • It is possible that after the initial fixed rate period, any refinance would be at a higher rate.
  • Payments may change over time.

Considering the inherent risks of and ARM, you should consult with a licensed financial advisor about its suitability for you.