What do all the numbers mean when referring to ARM loans?

ARMs explained

Adjustable rate mortgages (ARM) don’t involve a lot of definitions, but you will need to understand the numbers associated with them.

You will see numbers like 3/1, 5/1, and other combinations, and all of these are quite easy to understand once you become familiar with what each number represents.

In the case of ARM loans, the preceding number signifies how long the fixed rate lasts before the interest rate becomes variable. The second number represents how often the interest rate will fluctuate.

For example, a 3/1 ARM is a loan which has a fixed interest rate for the first three years of the loan and becomes a variable interest rate for the remainder of the amortization (typically 30 years). This loan will experience an interest rate adjustment once a year, which is what the “1″ represents.

How high or how low the interest rate can eventually climb or fall depends on the original mortgage terms and is signified by a numerical “cap.” If the 3/1 ARM has a 5 percent cap, this means that the interest rate can never go higher or lower than 5 percentage points of the original interest rate.