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CONSUMER HANDBOOK ON
Adjustable-Rate
Mortgages
Find out how
your payment can
change over time
An ofcial publication of the U.S. government
How to use the booklet
When you and your mortgage lender discuss
adjustable-rate mortgages (ARMs), you receive
a copy of this booklet. When you apply for an
ARM loan, you receive a Loan Estimate. You can
request and receive multiple Loan Estimates
from competing lenders to nd your best deal.
You may want to have your Loan Estimate handy
for any loan you are considering as you work
through this booklet. We reference a sample
Loan Estimate throughout the booklet to help
you apply the information to your situation.
You can nd more information about ARMs
at cfpb.gov/about-arms. You’ll also nd other
mortgage-related CFPB resources, facts, and
tools to help you take control of the homebuying
process.
About the CFPB
The Consumer Financial Protection Bureau
regulates the offering and provision of consumer
nancial products and services under the federal
consumer nancial laws and educates and
empowers consumers to make better informed
nancial decisions.
This booklet, titled Consumer Handbook on Adjustable
Rate Mortgages, was created to comply with federal law
pursuant to 12 U.S.C. 2604 and 12 CFR 1026.19(b)(1).
How can this booklet help you?
This booklet can help you decide whether an
adjustable-rate mortgage (ARM) is the right
choice for you and to help you take control of
the homebuying process.
Your lender may have already provided you
with a copy of Your Home Loan Toolkit. You
can also download the Toolkit from the CFPB’s
Buying a House guide at cfpb.gov/buy-a-
house/.
An ARM is a mortgage with an interest
rate that changes, or “adjusts,”
throughout the loan.
With an ARM, the interest rate and
monthly payment may start out low.
However, both the rate and the payment
can increase very quickly.
Consider an ARM only if you can afford
increases in your monthly payment—even
to the maximum amount.
After you nish this booklet:
• You’ll understand how an ARM works and
whether it’s the right choice for you. (page 2)
• You’ll know how to review important
documents when you apply for an ARM.
(page 6)
• You’ll understand the risks that come with
different types of ARMs. (page 18)
2 ADJUSTABLE-RATE MORTGAGES IS AN ADJUSTABLE-RATE MORTGAGE RIGHT FOR YOU? 3
Is an ARM right for you?
ARMs come with the risk of higher payments in
the future that you might not be able to predict.
But in some situations, an ARM might make sense
for you. If you are considering an ARM, be sure to
understand the tradeoffs.
TIP
Don’t count on being able to renance before your
interest rate and monthly payments increase. You
might not qualify for renancing if the value of
your home goes down or if something unexpected
damages your nancial situation, like a job loss or
medical costs.
COMPARE FIXED-RATE MORTGAGE ADJUSTABLE-RATE MORTGAGE
Consider
this option if
§ You prefer predictable
payments, or
§ You plan to keep your home
for a long period of time
§ You are condent you can afford increases
in your monthly payment —even to the
maximum amount, or
§ You plan to sell your home within a short
period of time
Interest rate
§ Set when you take out the loan
§ Stays the same for the entire
loan term
§ Based on an index that changes
§ May start out lower than a xed rate mortgage
but you bear the risk of increases throughout
your loan
Monthly
payment
§ Principal and interest payment
stays the same over the life of
your loan
§ You know the total you will pay
in principal and interest over
the life of the loan
§ Initial principal and interest payment amount
remains in effect for a limited period
§ You can't know in advance how much
total interest you will pay because your
interest rate changes
§ If you can’t afford the increased payments,
you may lose your home to foreclosure
4 ADJUSTABLE-RATE MORTGAGES LEARN ABOUT HOW ARMS WORK 5
Learn about how ARMs work
As you decide whether to move ahead with an
ARM, you should understand how they work and
how your housing costs can be affected.
Interest rate = index + margin
The interest rate on an ARM has two parts: the
index and the margin.
INDEX
An index is a measure of interest rates generally
that reects trends in the overall economy.
Different lenders use different indexes for their
ARM programs.
Common indexes include the U.S. prime rate
and the Constant Maturity Treasury (CMT) rate.
Talk with your lender to nd out more about the
index they use, which is also shown on your Loan
Estimate.
MARGIN
The margin is an extra percentage that the
lender adds to the index.
You can shop around to different lenders to nd
the lowest combination of the index plus the
margin. Your Loan Estimate shows the index and
the margin being offered to you.
Changes to initial rate and payment
The initial interest rate and initial principal and
interest payment amount on an ARM remain in
effect for a limited period.
So, when you see ARMs advertised as 5/1 or
5/6m ARMs:
• The rst number tells you the length of time
your initial interest rate lasts.
• The second number tells you how often the
rate changes after that.
For example, during the rst ve years in a 5/6m
ARM your rate stays the same. After that, the rate
may adjust every six months (the 6m in the 5/6m
example) until the loan is paid off. This period
between rate changes is called the adjustment
period. Adjustment periods can vary. Some last
a month, a year, or like this example, six months.
For some ARMs, the initial rate and payment can
be very different from the rates and payments later
in the loan term. Even if the market for interest
rates is stable, your rates and payments could
change a lot.
6 ADJUSTABLE-RATE MORTGAGES
Use your Loan Estimate to
understand your ARM
When you apply for a mortgage,
the lender gives you a document
called a Loan Estimate. It
describes important features of
the loan the lender is offering
you. This section illustrates the
parts of a Loan Estimate that are
specic features of ARM loans.
An interactive, online version of a
Loan Estimate sample is available
at: cfpb.gov/arm-explainer/
Adjustable
Interest Rate
(AIR) Table
Loan Costs Other Costs
Total Closing Costs (J)
Closing Costs Financed (Included in Loan Amount)
Down Payment/Funds from Borrower
Deposit
Funds for Borrower
Seller Credits
Adjustments and Other Credits
Estimated Cash to Close
Calculating Cash to Close
PAGE 2 OF 3 • LOAN ID # 123456789LOAN ESTIMATE
Closing Cost Details
A. Origination Charges
% of Loan Amount (Points)
B. Services You Cannot Shop For
C. Services You Can Shop For
D. TOTAL LOAN COSTS A + B + C
E. Taxes and Other Government Fees
Recording Fees and Other Taxes
Transfer Taxes
F. Prepaids
Homeowner’s Insurance Premium ( months)
Mortgage Insurance Premium ( months)
Prepaid Interest ($ per day for days @ )
Property Taxes ( months)
G. Initial Escrow Payment at Closing
Homeowner’s Insurance $ per month for mo.
Mortgage Insurance $ per month for mo.
Property Taxes $ per month for mo.
H. Other
I. TOTAL OTHER COSTS (E + F + G + H)
J. TOTAL CLOSING COSTS
D + I
Lender Credits
Adjustable Interest Rate (AIR) Table
Index + Margin 1 Year Cmt + 2.25%
Initial Interest Rate 3%
Minimum/Maximum Interest Rate 2.25% / 8%
Change Frequency
First Change Beginning of 61st month
Subsequent Changes Every 12 months after first change
Limits on Interest Rate Changes
First Change 2%
Subsequent Changes 2%
Loan Terms
Projected Payments
Can this amount increase after closing?
Loan Amount
$216,000
NO
Interest Rate
3%
YES
· Adjusts every year starting in year 6
· Can go as high as 8% in year 8
· See AIR Table on page 2 for details
Monthly Principal & Interest
See Projected Payments Below
for Your Total Monthly Payment
$910.66
YES
· Adjusts every year starting in year 6
· Can go as high as $1,467 in year 8
Does the loan have these features?
Prepayment Penalty
NO
Balloon Payment
NO
DATE ISSUED
APPLICANTS
PROPERTY
SALE PRICE
LOAN TERM 30 years
PURPOSE Purchase ce
PRODUCT 5/1 Adjustable Rate
LOAN TYPE
x
Conventional
FHA VA _____________
LOAN ID # 1234567891330172608
RATE LOCK
x
NO
YES
Costs at Closing
Estimated Closing Costs
$X,XXX
Includes in Loan Costs + in Other Costs –
in Lender Credits.
See details on page 2.
Estimated Cash to Close
$XX,XXX
Includes Closing Costs. See calculating Cash to Close on page 2
for details.
Loan Estimate
Before closing, your interest rate, points, and lender credits can
change unless you lock the interest rate. All other estimated
closing costs expire on
Save this Loan Estimate to compare with your Closing Disclosure.
PAGE 1 OF 3 • LOAN ID # 123456789LOAN ESTIMATE
Visit www.consumernance.gov/learnmore for general information and tools.
Payment Calculation Years 1-5 Years 6 Years 7 Years 8-30
Principal & Interest
$910.66 $838 min
$1,123 max
$838 min
$1,350 max
$838 min
$1,467 max
Mortgage Insurance
Estimated Escrow
Amount can increase over time
+ 99
+ 341
+ 99
+ 341
+ 99
+ 341
+ ––
+ 341
Estimated Total
Monthly Payment
$1,290 $1,217 – $1,502 $1,217 – $1,729 $1,179 – $1,808
Estimated Taxes, Insurance
& Assessments
Amount can increase over time
$341
a month
This estimate includes
x
Property Taxes
x
Homeowner’s Insurance
Other:
In escrow?
YES
YES
See Section G on page 2 for escrowed property costs.
You must pay for other property costs separately.
Projected
Payments
Loan Terms
USE YOUR LOAN ESTIMATE TO UNDERSTAND YOUR ARM 7
Product
8 ADJUSTABLE-RATE MORTGAGES
Loan Terms
USE YOUR LOAN ESTIMATE TO UNDERSTAND YOUR ARM 9
Loan terms
INTEREST RATE
The Loan Estimate shows the initial interest rate
you pay at the beginning of your loan term. This
row also shows how often your rate can change
and how high it can go.
MONTHLY PRINCIPAL & INTEREST
The Loan Estimate shows the initial monthly
principal and interest payment you’ll make if you
accept this loan. Your principal is the money that
you originally agreed to pay back on your loan.
Interest is a cost you pay to borrow the principal.
The initial principal and interest payment
amount for an ARM is set only for the initial
period and may change after that.
THE TALK
You might hear, “An ARM makes sense
because you can renance the loan
before your interest rate and monthly
payment increase.”
Ask yourself, a spouse, or a loved one:
“What if the market value of the home
goes down?”
“What if our nancial situation or
our credit score gets damaged by
something unexpected like a job loss
or illness?”
“If we can’t renance at a better rate,
can we afford the maximum interest
rate and payment increase under
this loan?”
Can this amount increase after closing?
Loan Amount
$216,000
NO
Interest Rate
3%
YES
· Adjusts every year starting in year 6
· Can go as high as 8% in year 8
· See AIR Table for details
Monthly Principal & In
terest
See Projected Payments Below
for Your Total Monthly Payment
$910.66
YES
· Adjusts every year starting in year 6
· Can go as high as $1,467 in year 8
Does the loan have these features?
Prepayment Penalty
NO
Balloon Payment
NO
Example of “Loan terms” section. Find this on page 1 of
your own Loan Estimate
10 ADJUSTABLE-RATE MORTGAGES
Projected Payments
Payment Calculation Years 1-5 Years 6 Years 7 Years 8-30
Principal & Interest $910.66
$838 min
$1,123 max
$838 min
$1,350 max
$838 min
$1,467 max
Mortgage Insurance
Estimated Escrow
Amount can increase over time
+ 99
+ 341
+ 99
+ 341
+ 99
+ 341
+ ––
+ 341
Estimated Total
Monthly Payment
$1,290 $1,217 – $1,502 $1,217 – $1,729 $1,179 – $1,808
Estimated Taxes, Insurance
& Assessments
Amount can increase over time
$341
a month
This estimate includes
x
Property Taxes
x
Homeowner’s Insurance
Other:
In escrow?
YES
YES
See Section G on page 2 for escrowed property costs.
You must pay for other property costs separately.
USE YOUR LOAN ESTIMATE TO UNDERSTAND YOUR ARM 11
Example of “Projected payments” section. Find this on
page 1 of your own Loan Estimate
Projected payments
PRINCIPAL & INTEREST
The monthly principal and interest payment on
your ARM is likely to change after the initial period.
Review this section to see how your payment can
change based on your loan’s interest rate.
ESTIMATED TOTAL MONTHLY PAYMENT
Review this row to see the total minimum and
maximum monthly payments. The payments
include mortgage insurance, property taxes,
homeowners insurance, and any additional
property assessments or other escrow items.
Learn more about these mortgage terms at
cfpb.gov/mortgage-terms/
Keep in mind that other parts of your monthly
and annual housing costs can change, such
as your property taxes and homeowners
insurance payments.
THE TALK
Talk over how your nancial life could
be affected if your ARM monthly
payment increases. In future years, you
might face money decisions like:
• Job changes
• School or other education expenses
• Medical needs and expenses
Because ARM adjustments are
unpredictable, you might have less or
more nancial exibility for other parts
of your life.
12 ADJUSTABLE-RATE MORTGAGES
Adjustable Interest Rate (AIR) table
You should read and understand the AIR table
calculations before committing to an ARM.
It's important to know how your interest rate
changes over the life of your loan.
INDEX + MARGIN
Your lender is required to show you how your
interest rate is calculated, which is determined by
the index and margin on your loan. See page 2 of
this booklet for more about index and margin.
INITIAL INTEREST RATE
This is the interest rate at the beginning of your
loan. The initial interest rate changes to the
index plus the margin at your rst adjustment
(subject to the limits on interest rate changes).
Your loan servicer tells you your new payment
amount seven to eight months in advance, so
you can budget for it or shop for a new loan.
MINIMUM/MAXIMUM INTEREST RATE
This shows how low or high your interest rate could
be over the life of your loan. Generally, an ARM’s
interest rate is never lower than the margin.
CHANGE FREQUENCY
This indicates when the interest rate on your
loan will change. Your loan servicer sends you
advance notices of changes.
LIMITS ON INTEREST RATE CHANGES
This shows the highest amount your interest rate
can increase when there is a change.
Adjustable Interest Rate (AIR) Table
Index + Margin 1 Year Cmt + 2.5%
Initial Interest Rate 3%
Minimum/Maximum Interest Rate 2.5% / 8%
Change Frequency
First Change Beginning of 61st month
Subsequent Changes Every 12 months after rst change
Limits on Interest Rate Changes
First Change 2%
Subsequent Changes 2%
USE YOUR LOAN ESTIMATE TO UNDERSTAND YOUR ARM 13
Example of “AIR table” section. Find this on page 2 of your
own Loan Estimate
“TEASER” RATES
Some lenders offer a “teaser,” “start,” or
“discounted” rate that is lower than their fully
indexed rate. When the teaser rate ends, your
loan takes on the fully indexed rate. Don’t
assume that a loan with a teaser rate is a
good one for you. Not everyone’s budget can
accommodate a higher payment.
Consider this example:
• A lender’s fully indexed rate is 4.5%
(the index is 2% and the margin is 2.5%).
• The loan also features a “teaser” rate of 3%.
• Even if the index doesn’t change,
your interest rate still increases from 3%
to 4.5% when your teaser rate expires.
14 ADJUSTABLE-RATE MORTGAGES COMPARE YOUR ARM OFFERS 15
COMPARE YOUR ARM OFFERS
Shop for at least three loan offers, and ll in the blanks
below using the information on your Loan Estimates:
ARM OFFER 1 ARM OFFER 2
FIXED-RATE
OFFER
Lender name
Loan amount
Initial interest rate
Initial principal and interest payment
Index
Margin
How long will the initial interest rate and initial
payment apply?
How high can my interest rate go?
How high can my principal and interest payment go?
My best loan offer is:
THE TALK
You are in control of whether or not to proceed
with an ARM. If you prefer to proceed with a
xed-rate mortgage, here is one way to start
the conversation with a lender:
“Axed-ratemortgageseemstobeabetter
tforme.Let’stalkaboutwhatyoucanoffer
andhowitcomparestootherloansImaybe
abletoget.”
16 ADJUSTABLE-RATE MORTGAGES
Review your lender’s ARM
program disclosure
Your lender gives you an ARM program disclosure
when they give you an application. This is the
lender’s opportunity to tell you about their
different ARM loans and how the loans work. The
index and margin can differ from one lender to
another, so it is helpful to compare offers from
different lenders.
Generally, the index your lender uses won’t
change after you get your loan, but your loan
contract may allow the lender to switch to a
different index in some situations.
GATHER FACTS
Review your program disclosure and ask your
lender questions to understand their ARM
loan offerings:
How are the interest rate and payment
determined?
Does this loan have interest-rate caps (that
is, limits on interest rate changes)?
How often do the interest rate and
payment adjust?
What index is used and where is it published?
Is the initial interest rate lower than the fully
indexed rate? (see “Teaser rates,” on page 12)
What type of information is provided in notices
of adjustment and when do I receive them?
REVIEW YOUR LENDER’S ARM PROGRAM DISCLOSURE 17
Ask about other options
offered by your lender
Conversion option
Your loan agreement may include a clause
that lets you convert the ARM to a xed-rate
mortgage in the future.
When you convert, the new rate is generally set
using a formula given in your loan documents.
That xed rate may be higher or lower than
interest rates available to you in the market at
that time. Also your lender may charge you a
conversion fee. Ask your lender whether the loan
you are being offered has a conversion feature
and how it works.
Special features
You can shop around to understand what special
ARM features may be available from different
lenders.
Not all programs are the same. Talk with your
lender to nd out if there’s anything special about
their ARM programs that you may nd valuable.
caps
18 ADJUSTABLE-RATE MORTGAGES CHECK YOUR ARM FOR ADDITIONAL FEATURES 19
Check your ARM for features
that could pose risks
Some types of ARMs have features that can
reduce your payments in the short term but
may include fees or the risk of higher payments
later. Review your loan terms and make sure
that you understand the fees and how your rate
and payment may change. Lower payments at
the beginning could mean higher fees or much
higher payments later.
Paying points to reduce your initial
interest rate
Lenders can offer you a lower rate in exchange
for paying loan fees at closing, or points.
With an ARM, paying points often reduces
your interest rate only until the end of the initial
period—the reduction most likely does not apply
over the life of your loan.
If you are using an ARM to renance a loan,
points are often rolled into your new loan
amount. You might not realize you are paying
points unless you look carefully. Points are
disclosed on the top of Page 2 of your Loan
Estimate.
Lenders may give you the option to pay points,
but you never have to take that option. To gure
out if you have a good deal, compare your cost
in points with the amount that you will save with
a lower interest rate.
Loan Costs
A. Origination Charges $3,160
1% of Loan Amount (Points) $2,160
Application Fee $500
Processing Fee $500
Example of “Loan costs” section. Find this on page 2 of
your own Loan Estimate
THE TALK
If your Loan Estimate shows points, ask
your lender:
• “What is my interest rate if I choose
not to pay points?”
• “How much money do I pay in
points? And, compared to the
total reduction in my payments
during the initial period, am I
coming out ahead?”
• “Can I see a revised Loan Estimate
with the points removed and the
interest rate adjusted?”
20 ADJUSTABLE-RATE MORTGAGES CHECK YOUR ARM FOR ADDITIONAL FEATURES 21
Interest-only ARMs
With an interest-only ARM payment plan, you pay
only the interest for a specied number of years.
During this interest-only period, you have smaller
monthly payments, but you are not paying
anything toward your mortgage loan balance.
When the interest-only period ends, your
monthly payment increases—even if interest
rates stay the same—because you must start
paying back the principal plus the interest each
month. Your monthly payments can increase
a lot. The longer the interest-only period, the
more your monthly payments increase after the
interest-only period ends.
Payment option ARMs
Payment option ARMs were common before
2008 when the housing crisis began, and some
lenders might still offer them.
A payment option ARM means the borrower can
choose from different payment options, such as:
• A traditional principal and interest payment
• An interest-only payment (see above)
• A minimum payment, which could result in
negative amortization
Negative amortization happens when you are
not paying enough to cover all of the interest
due. Your loan balance goes up instead of down.
GATHER FACTS
Learn more information about payment option
ARMs and negative amortization at:
• cfpb.gov/payment-option-arm/
• cfpb.gov/negative-amortization/
WELL DONE!
Choosing the right home loan is just
as important as choosing the right
home. By equipping yourself with
knowledge about ARMs, you can
decide whether or not this type of
loan is the right choice for you.
Negative amortization
Consumer Handbook on
Adjustable-Rate Mortgages
A SK YOUR LENDER
• How high can my payment go?
• How high can my interest rate go?
• How long is my initial principal and
interest payment guaranteed?
ASK YOURSELF
• Have I shopped around to compare ARMs
and xed-rate loans?
• If an ARM has a lower initial interest rate
than a xed-rate mortgage, is paying less
money now worth the risk of an increase
later?
• Can I afford the highest payment possible
with the ARM if I can’t sell the home, or
renance into a lower rate, before the
increase?
ON LINE TOOLS
CFPB website
cfpb.gov
A nswers to common questions
cfpb.gov/askcfpb
Tools and resources for home buyers
cfpb.gov/owning-a-home
Talk to a housing counselor
cfpb.gov/nd-a-housing-counselor
Submit a complaint
cfpb.gov/complaint
Last updated 06/20
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