What is an ARM mortgage?

An adjustable-rate mortgage, or ARM, is a home loan in which the buyer gets an introductory interest rate for a defined period; then the rate is adjusted annually. Common ARMs are 3/1, 5/1, 7/1 and 10/1. The first number indicates the introductory period, and the "1" demonstrates the annual adjustment.

Buyers are sometimes attracted to ARMs because the upfront loan rate is often lower than the rate on fixed loans. The risk with an ARM is that mortgage payments increase after the adjustment if rates have risen. People also get ARMs because they intend to own the home briefly or they anticipate substantial income growth before the adjustment.