A Fixed-Period ARM, also known as a hybrid ARM, combines the initial stability of a fixed-rate mortgage with the flexibility of an adjustable-rate mortgage. It typically offers a lower interest rate during the initial fixed period, which lasts 5, 7, or 10 years, depending on the loan product (e.g., 5/1, 7/1, or 10/1 ARM). During this period, your monthly principal and interest payments remain constant, making budgeting predictable.

After the fixed period ends, the mortgage converts to an adjustable rate, which resets usually once a year based on a financial index plus a fixed margin. The index reflects general market conditions and can vary; if the index increases, the interest rate rises, and vice versa. The margin is a fixed percentage added by the lender and remains constant throughout the loan. This results in fluctuating monthly payments.

To protect borrowers from unexpected spikes, ARMs include rate caps limiting how much the interest rate can increase at each adjustment and over the loan’s life. For example, the Consumer Financial Protection Bureau outlines caps such as initial adjustment caps, periodic caps, and lifetime caps that prevent excessive increases.

Fixed-Period ARMs are ideal for borrowers who expect to sell or refinance within the fixed period or anticipate an increase in income to cover potential higher payments later. However, risks include payment uncertainty after the fixed period and reliance on refinancing options which may not always be available due to market or personal financial changes.

It’s important to understand the “fully indexed rate”—the rate your loan would have if it were adjusted today—to assess true future costs, rather than focusing solely on the initial teaser rate.

Comparing a Fixed-Period ARM to a Fixed-Rate Mortgage, the key difference is that fixed-rate loans offer consistent interest rates and payments for the entire loan term, reducing risk. Fixed-Period ARMs start with lower rates but introduce variability after the fixed term.

For more on adjustable-rate mortgages and loan terms, see our Adjustable-Rate Mortgage (ARM) glossary entry and the Fixed Rate vs ARM Comparison.

Key Points to Remember

  • Fixed-Period ARMs offer lower initial rates with predictable payments during the fixed period.
  • Afterward, rates adjust annually based on a market index plus a margin.
  • Rate caps limit how much payments can increase.
  • Best suited for homeowners planning to move or refinance before adjustments.
  • Understand all loan terms, especially rate caps and the fully indexed rate.

Useful Resources