What should I review in the terms of an adjustable-rate mortgage?
Short answer
Read how often the rate can change, which index and margin apply, and what caps or floors limit those changes. Also check whether the payment resets when the rate does, whether the balance can grow, and whether a prepayment penalty applies. The CFPB says adjustable-rate mortgages have many moving parts that affect cost.
Full explanation
The CFPB says an can be complicated, so read the terms and ask questions until each feature is clear. Confirm when and how often the rate adjusts. Many ARMs stay fixed for an opening stretch, such as three or five years, then typically recalculate once a year, but that pattern is not required. Some loans have no opening fixed period and can move more or less often.
Ask which index and margin set the rate at each change, and what caps limit how far the rate can move at one adjustment and over the life of the loan. Also ask whether the payment is recalculated whenever the rate changes. If the rate rises and the payment does not, the balance can grow.
Check whether the balance is allowed to increase after closing, including when a payment does not cover the interest—a feature called negative amortization. Some loans have a floor rate that will not fall even if the index does, or a clause that lets the rate move only upward. The CFPB notes that those features can affect cost and risk.
Ask whether paying the loan off early carries a fee. Most loans do not have a prepayment penalty, but the CFPB still recommends checking. This FAQ does not recommend choosing or avoiding an ARM.
Sources reviewed
If I am considering an adjustable-rate mortgage (ARM), what should I look out for in the fine print?
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Last reviewed
September 10, 2026