A fixed-rate mortgage has an interest rate that remains the same for the entire term of the loan. In contrast, an adjustable-rate mortgage (ARM) has an interest rate that can fluctuate over time.

ARMs typically begin with a lower interest rate than fixed-rate mortgages. This initial rate may remain the same for a few months, one year, or several years. Once the introductory period ends, the interest rate will adjust at regular intervals, which could result in an increase in your monthly payment.

The interest rate on your ARM is often tied to a broader interest rate benchmark known as an index. When the index rises, your payment may also increase. Conversely, if interest rates drop, your payment could go down—although not all ARMs work this way. Some ARMs have caps that limit how much your interest rate can increase at any given time or over the life of the loan. Additionally, some ARMs place limits on how much your rate can decrease. These caps may differ for the initial rate adjustment and for subsequent changes. Your final interest rate will depend on the index plus a set margin, with the margin representing the percentage points added by the lender to determine your rate.

Before choosing an adjustable-rate mortgage, make sure you understand how it works. Ask yourself the following questions:

• What are the potential high and low ranges for your interest rate and monthly payment after each adjustment?
• How often will your interest rate adjust?
• When could your payment increase?
• Is there a cap on how much your interest rate could rise?
• Is there a floor on how low your interest rate could fall?
• Will you still be able to afford the mortgage if your rate and payment reach the maximum limits specified in the contract?

If you’re looking for a mortgage, explore our homebuyer tools and resources. If you already have a mortgage, check out this checklist to make the most of your current loan.