 TITLE: What Is an Adjustable-Rate Mortgage? CONTENT: How Does an Adjustable-Rate Mortgage Work?\n------------------------------------------\nThe interest rate on an ARM is fixed for an initial period, during which it won't change. After that period ends, the rate fluctuates with limits based on the current market rates. A true ARM has a fixed interest rate for just one year.\nThere are, however, hybrid ARMs that offer longer introductory periods where the interest rate is fixed.\n### Types of Adjustable-Rate Mortgages\nHere are five common types of adjustable-rate mortgages you may see when shopping around for a loan:\n*   1-year ARM: The initial rate is fixed for 1 year, after which the rate can be adjusted once a year.\n*   3\/1 hybrid ARM: The initial rate is fixed for the first 3 years, after which the rate can be adjusted once a year.\n*   5\/1 hybrid ARM: The initial rate is fixed for 5 years, after which the rate can be adjusted once a year.\n*   7\/1 hybrid ARM: The initial rate is fixed for 7 years, after which the rate can be adjusted once a year.\n*   10\/1 hybrid ARM: The initial rate is fixed for 10 years, after which the rate can be adjusted once a year.\nIn general, the shorter the initial fixed-rate period, the lower the initial rate will be. For instance, the initial rate on a 1-year ARM will be lower than the initial rate on a 3\/1 ARM, and a 3\/1 ARM will have a lower initial rate than a 5\/1 ARM. This is because the longer the lender keeps the initial rate fixed, the more risk it takes that interest rates will rise during that time.\n### How Much Can the Interest Rate Change on an Adjustable-Rate Mortgage?\nAfter the initial period, the first reset is often capped at a maximum of 2 percentage points, though it can be as much as 5 percentage points. Subsequent rate adjustments are typically limited to 2 percentage points a year.\nThere is also a lifetime rate cap; this is the total maximum rate increase that can be charged over the life of the loan. The lifetime cap is typically 6 percentage points or so above the initial interest rate. While these figures are typical, though, they're not set in stone.\nWhen you apply for a mortgage, a lender is required to provide you with a loan estimate that spells out the various costs and features of the loan. If you are applying for an ARM, the loan estimate will include the maximum pay increase you will owe at the first adjustment, how often the rate can be adjusted, and the maximum monthly payment you could ever be charged. END