An adjustable-rate mortgage has an interest rate that changes over time rather than staying fixed for the life of the loan. It usually starts with a lower fixed introductory rate for an initial period, then adjusts periodically based on a market index plus a set margin.
ARMs are often described by two numbers, such as 5/1, meaning the rate is fixed for five years and then adjusts once a year. Rate changes are limited by caps that restrict how much the rate can rise per adjustment and over the life of the loan.
ARMs can offer lower initial payments than fixed-rate loans, which appeals to buyers who expect to move or refinance before the rate adjusts. The trade-off is uncertainty, since payments can rise significantly once the adjustable period begins.