An ARM starts with a fixed interest rate for an initial period (commonly 5, 7, or 10 years), then adjusts annually based on a benchmark index plus a margin set by the lender.
ARM Rate = Index Rate + Lender Margin (e.g., SOFR + 2.5%)
Common ARM structures for rental investors:
- 5/1 ARM — fixed 5 years, adjusts annually after
- 7/1 ARM — fixed 7 years, adjusts annually after
- 10/1 ARM — fixed 10 years, adjusts annually after
ARMs carry rate risk after the fixed period ends. They are attractive when you plan to sell or refinance before the adjustment period begins, or when you expect rates to fall.