Fixed-Period ARM

DEFINITION of 'Fixed-Period ARM'

An adjustable-rate mortgage (ARM) with an initial fixed-interest-rate period. After the fixed-interest rate expires, the interest rate starts to adjust based on an index plus a margin.  The amount by which the interest rate can adjust after the fixed period is usually subject to an interest rate cap structure. 

These are often called "hybrid ARMs".

BREAKING DOWN 'Fixed-Period ARM'

Typically, in the prime mortgage market, fixed-period ARMs are offered with fixed-interest rate periods of three, five, seven and 10 years. In the subprime market a two-year fixed-rate period is frequently offered. Typically, the shorter the fixed-interest rate period, the lower the interest rate will be. A borrower should carefully consider their time horizon when choosing a fixed-period ARM and recognize the risks associated with the expiration of the fixed-interest rate period.

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