Adjustable Rate Mortgage ("ARM"), also called Hybrid ARM, is a loan option which combines both fixed-rate and adjustable-rate features. An ARM starts out with an interest rate that is fixed for specific number of years. Once this period has elapsed, the loan converts to an ARM for rest of the loan term. All ARMs are amortized on a 30-year schedule.
Once the fixed-rate period is completed, the rate is adjusted every 6 months based on the Secured Overnight Financing Rate ("SOFR"). SOFR is based on actual transactions in the Treasury repurchase (repo) market, where extensive trading happens daily. This is the market where investors offer borrowers overnight loans backed by their U.S. Treasury bond assets. Until 2020, ARMs were based on LIBOR (London Inter-Bank Offer Rate). LIBOR was phased out and replaced with SOFR starting in 2021.
Popular ARM terms are:
These types of loans are popular: (i) if interest rates are high and are expected to be lower in future and (ii) for people who do not intend to live long in their homes.