What is Adjustable-Rate Mortgage (ARM)?

An adjustable-rate mortgage has an interest rate that periodically adjusts based on a reference index plus a margin, often after an initial fixed-rate period — exposing the borrower to rate risk in exchange for a lower starting rate.

Common US ARMs are described as 5/1 or 7/1: a 5- or 7-year fixed period followed by annual adjustments tied to SOFR or another index. Caps limit how much the rate can move per adjustment and over the life of the loan.

In Switzerland, the equivalent is the SARON-based mortgage, which resets every 1 or 3 months based on the overnight rate — fully variable from day one. ARMs are attractive when interest rates are expected to fall or when the borrower plans to sell before the first adjustment.

Example

A US borrower takes a 5/1 ARM at 4.5%; for years 1–5 the rate is fixed, then each year it resets to SOFR + 2.25%, with caps of 2% per adjustment and 5% over the life of the loan.

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Related terms

Fixed-Rate Mortgage

A fixed-rate mortgage is a home loan with an interest rate that remains constant for the full term — typically 5, 10, 15, 25 or 30 years — providing predictable monthly payments and protection against rate rises.

Refinance

Refinancing is the process of replacing an existing mortgage with a new one — typically to obtain a lower interest rate, change the loan term, switch between fixed and adjustable, or cash out equity.

Loan-to-Value (LTV)

Loan-to-value is the ratio of a mortgage loan to the appraised value of the property, expressed as a percentage, used by lenders to assess the risk of the loan.

Debt-to-Income (DTI)

Debt-to-income is the percentage of a borrower's gross monthly income that goes toward debt payments, used by lenders to assess affordability and creditworthiness.

Frequently asked questions

When is an ARM smart?+

When you plan to sell or refinance before the first reset, or when fixed rates are unusually high.

What is the worst case?+

Rates hit the lifetime cap, raising payments by hundreds or thousands per month.

What is a SARON mortgage?+

The Swiss equivalent — a fully variable mortgage tied to the overnight SARON benchmark.