Casa Academy

Reviewed by Casa Academy and updated July 29, 2026 using the current DBPR checklist and Pearson VUE scheduling guidance.

Adjustable-Rate Mortgage

An adjustable-rate mortgage (ARM) is a home loan whose interest rate resets periodically based on a published index plus a lender margin, so monthly payments can rise or fall after an initial fixed-rate period.

Exam context

ARM questions test vocabulary (index, margin, teaser rate) and whether the borrower was disclosed future payment changes. Compare ARMs with fixed-rate loans when a buyer plans to sell before the first adjustment.

Index, margin, and adjustment periods

The note names an index (such as SOFR or a Treasury yield) and a margin that stays constant. At each adjustment date, the new rate equals index value plus margin, subject to periodic and lifetime caps. A 5/1 ARM fixes the rate for five years, then adjusts annually.

Caps protect borrowers from payment shock

Periodic caps limit how much the rate can change at one adjustment. Lifetime caps limit how far the rate can move above the start rate. Exams may give index movement and ask whether the cap or the raw index-plus-margin calculation controls the new rate.

Examples

  • First adjustment

    A 3/1 ARM starts at 5% with a 2% periodic cap. At year four the index plus margin equals 8%, but the cap limits the increase to 7% for that adjustment.

  • Buyer time horizon

    A military buyer expects to relocate in three years. A 5/1 ARM with a lower initial rate may cost less than a 30-year fixed if they sell before adjustments begin.

Keep studying

Practice adjustable-rate mortgage (arm) questionsEnroll in pre-licensing

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