Unlike a conventional mortgage, ARMs have two distinct phases: an initial phase with a fixed, low interest rate, and an adjustable phase where your mortgage rate (and payment) will fluctuate based on market conditions.
How are ARM rates calculated?
ARM rates are calculated using two numbers:
- The index. This is a rate that’s used in banking and fluctuates with financial markets. It’s added to your margin to determine your interest rate once the fixed-rate period ends.
- The margin. This is a set percentage added to the index to calculate your rate when an ARM adjusts. This number doesn’t change during the entire loan term.
When do ARM rates adjust?
ARMs have names that tell you how and when the rate will adjust. A 5/1 ARM, for example, comes with a five-year initial period during which the rate is fixed. After that, the rate will adjust once per year.

How do ARM rates adjust?
An ARM’s interest rate adjustments are governed by three limits, called rate caps. You’ll usually see them listed out with slashes between them, for example: 2/2/5.
- Initial adjustment cap. This sets the limits for how much your rate can increase the very first time it adjusts.→ As an example, if your ARM has a 2/2/5 rate cap structure, the first “2” shows that your rate can’t rise by more than 2 percentage points at its first adjustment.
- Periodic (aka “subsequent”) adjustment cap. Any ARM adjustment after the first one is subject to this cap.→ In a 2/2/5 cap structure, the second “2” reflects that your rate can’t rise by more than 2 percentage points at any one adjustment after the first.
- Lifetime adjustment cap. This number shows the maximum amount of percentage points your rate could rise by over the life of the loan.→ A 5/1 ARM with 2/2/5 caps can raise a maximum of 5 percentage points from the rate it started at.

Learn more about how ARM loans work by reading the
Consumer Handbook on Adjustable-Rate Mortgages, which lenders are required to provide to ARM borrowers.