An adjustable-rate mortgage (ARM), also known as a variable-rate mortgage, is a home loan with an interest rate that adjusts over time based on the market. ARMs typically have a lower initial interest rate than fixed-rate mortgages, making them a great option if your goal is to get the lowest possible mortgage rate starting out. However, after the initial fixed period, your monthly payment can fluctuate periodically, making it difficult to factor into your budget. ARMs are long-term home loans with two periods: a fixed period and an adjustable period. During the initial fixed-rate period, which typically lasts for the first 5, 7, or 10 years of the loan, your interest rate won’t change. After that period ends, your interest rate can go up or down based on changes in the benchmark.

ARMs come in different types, including hybrid ARMs, interest-only ARMs, and payment-option ARMs. Hybrid ARMs are the traditional adjustable-rate mortgage, which starts with a fixed interest rate for a few years, usually three to ten, and then the rate adjusts. Interest-only ARMs are adjustable-rate mortgages in which the borrower only pays interest, no principal, for a set period. Payment-option ARMs offer the borrower four monthly payment options: a specified minimum payment, an interest-only payment, a 15-year fully amortizing payment, and a 30-year fully amortizing payment.

ARMs generally permit borrowers to lower their initial payments if they are willing to assume the risk of interest rate changes. However, there is evidence that consumers tend to prefer contracts with the lowest initial rates, such as in the UK, where consumers tend to focus on immediate monthly mortgage costs. ARMs transfer some interest-rate risk from the lender to the borrower, thus allowing the lender to offer a lower note rate in many interest-rate environments.

The basic requirements for an ARM loan include a credit score of at least 620 and a debt-to-in...