There are different types of ARMs.
- The name of the ARM will indicate the duration of the initial period
- How often in a year your rate can adjust during the adjustment period
For example, let’s look at a 5/1 ARM. The initial period is five years (the 5), during which the interest rate doesn’t change. After that time, you can expect your ARM to adjust once a year (the 1).
Most ARMs also typically offer a rate cap structure, which is meant to limit how much your rate can increase or decrease. There are three different caps:
- Initial cap: Limits how much your rate can increase when your rate first adjusts
- Periodic cap: Limits how much your rate can increase from one adjustment period to the next
- Lifetime cap: Limits how much your rate can increase or decrease over the life of the loan