An adjustable rate mortgage has a fixed payment and interest rate for a few years. The fixed period can typically last for 2, 3, 7, or 10 years. After that, the interest rate and payment can go up or down.

A loan with a fixed rate for 3 years is usually called a 3/27 ARM. The rate of the loan is fixed for the first three years and then it adjusts annually or semi-annually. A 5/25 ARM loan offers a fixed rate for the first five years, and the it adjusts annually or semiannually.

ARMS are popular because they usually start with a lower interest rate, which means lower monthly payments. Lower monthly payments can help you qualify for a larger mortgage, especially if you’re confident your income will increase over time. But after the fixed period ends, your interest rate and monthly payments can increase. This is why it often makes sense to have a fixed rate for as many years as you expect to live in your home. You should also consider if your income is likely to increase enough to afford higher payments if interest rates go up.

ARMs typically have 2 'caps', or limits, on how high or low the interest rate can adjust. The higher the cap, the higher your payments can become. One cap sets the most that your interest rate can go up or down each year. The other cap sets the maximum rate your loan can have. Caps of 2% per year and 6% over the life of the loan are most common.

For example, if your loan starts at 5%, and the annual cap is 2%, your interest rate can only go up to 7% in the first year after the fixed period. The 6% lifetime cap means the highest rate your loan could have is 11% (5% starting rate + 6% cap = 11%). The EverydayMoney Mortgage Tool can help you estimate future payments with an adjustable rate mortgage (ARM).