The Adjustable-Rate Mortgage (ARM) has been a useful option for borrowers looking to minimize their interest rate or planning another move sooner rather than later, and recently it has been growing in popularity. If you already have an ARM or are considering its advantages, it’s important to prepare for its namesake inevitability. Although the initial interest rate will likely remain steady for several years, once an adjustment is on the horizon, you need to understand how you’ll be impacted and what options are available to you.  

Index and Margin and Caps, Oh My!

Having a plan for your upcoming ARM adjustment begins with having a comprehensive grasp of how the mortgage works. Three main factors will determine how much, if at all, your interest rate will change when your fixed-rate period ends.  

  •     Index– The index is a benchmark interest rate that sets the starting point for your individual rate. It is often based on bond markets or the rate used by banks to borrow from each other, and the number that fluctuates over time. 
  •     Margin– This is the additional interest rate that is added to the index. Adding this number to the current rate of the index at the time of adjustment will result in your total interest rate. 
  •     Caps– It’s likely your loan will feature caps that limit the amount your interest rate can increase in one year and over the life of the loan. A spike in the relevant index may be offset if the increase, plus the margin, put it over the loan’s cap.

The specific index used, along with the margin and caps, should be included with the disclosures provided when you closed your mortgage. They can also be requested from your lender.


One option available to borrowers with an ARM is to refinance to a fixed-rate mortgage. If your creditworthiness is similar or better than when you were initially approved, falling interest rates over the recent years could make this an excellent opportunity to lock in a historically low rate for the rest of your loan term.


An upcoming ARM adjustment may also be a motivation to move on to your next home. If you’ve been considering a change like an upgrade, downsize or change of scenery and are facing increased interest costs by staying put, it could be a good time to start fresh. While a rising ARM could mean other mortgage options will have similar rates, you’ll enjoy added flexibility thanks to your equity and shopping budget. 


Depending on your situation, a rate adjustment may not warrant any action on your part. If you find that your interest rate is staying the same or dropping, keeping the status quo could be the perfect solution. Just keep an eye toward your next adjustment to avoid being caught off guard in the future. 

For an experienced lender who can help you adjust to life’s unexpected changes, visit or call and speak with an origination specialist today.

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