finance

adjustable-rate mortgage

An adjustable-rate mortgage (ARM) is a loan whose interest rate changes periodically based on a published index plus a fixed margin set by the lender. ARMs often start with a lower rate than fixed-rate loans. Rate caps limit how much the rate can change at each adjustment and over the life of the loan, and payment caps may also apply. A 5/1 ARM, for example, has a fixed rate for five years, then adjusts yearly.

Exam tip: Fully indexed rate = index + margin. The index moves; the margin stays constant. Payment caps without rate caps can cause negative amortization.
Example: An ARM uses an index of 4% plus a 2.5% margin, giving a 6.5% rate; at the next adjustment the index is 4.5%, so the rate becomes 7%.

1. On an adjustable-rate mortgage, the interest rate after the initial period is determined by:

Answer & explanation

Answer: D. ARM rate = index + margin, subject to periodic and lifetime caps. In a 5/1 ARM the rate is fixed 5 years, then adjusts every year.

Related terms & state variants

fixed-rate mortgage index margin negative amortization rate cap

Sources

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Last verified: 2026-10-23