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A mortgage with an interest rate that changes periodically based on market conditions. ARMs typically start with a lower rate than fixed-rate mortgages but can increase or decrease over time, affecting monthly payments.
A 5/1 ARM has a fixed rate for 5 years, then adjusts annually. If you start at 6% and rates rise 2%, your payment on a $300,000 mortgage could increase by $350/month.
ARMs can save money if you plan to sell or refinance before the rate adjusts, but carry risk if rates increase significantly.
Pro Tip: Consider an ARM if you plan to move within 5-7 years. Otherwise, a fixed-rate mortgage provides payment stability.