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Adjustable-Rate Mortgages: Indexes, Margins, and Payment Changes

An adjustable-rate mortgage can start with a payment that looks comfortable and change later under a formula written into the contract. The index, margin, adjustment schedule, and caps determine that path. Understanding those parts before borrowing is more useful than guessing where interest rates will be when the introductory period ends.

The questions below use selected Consumer Financial Protection Bureau guidance, adapted and organized by Fynoptic. Source links and the dates displayed by those sources are provided at the end.

What is the difference between a fixed-rate and adjustable-rate mortgage (ARM) loan?

With a fixed-rate mortgage, the interest rate is set when you take out the loan and will not change. With an adjustable-rate mortgage, the interest rate may go up or down.

Tip

Don't assume you'll be able to sell your home or refinance your loan before the rate changes. The value of your property could decline, or your financial condition could change. If you can't afford the higher payments on today's income, you may want to consider another loan.

Many ARMs will start at a lower interest rate than fixed-rate mortgages. This initial rate may stay the same for months, one year, or a few years. When this introductory period is over, your interest rate will change on a regular interval, and the amount of your payment is likely to go up.

Part of the interest rate you pay will be tied to a broader measure of interest rates, called an index. Your payment goes up when this index of interest rates increases. When interest rates decline, sometimes your payment may go down, but that is not true for all ARMs. Some ARMs set a cap on how high your interest rate can increase at any time or over the life of the loan. Some ARMs also limit how much your interest rate may decrease at any time or over the life of the loan. The caps may be different for the initial change versus the subsequent regular interval changes. Your actual rate and the time of change will be based on the new index plus a set margin, subject to any caps. The margin is a number of percentage points added to the index by the lender that sets your interest rate.

Know how your ARM adjusts. Before taking out an adjustable-rate mortgage, find out:

  • How high or low your interest rate and monthly payments can go with each adjustment
  • How frequently your interest rate will adjust
  • How soon your payment could go up
  • If there is a cap on how high your interest rate could go
  • If there is a limit on how low your interest rate could go
  • If you will still be able to afford the loan if the rate and payment go up to the maximums allowed under the loan contract

If you're shopping for a mortgage, visit Buying a house, our set of tools and resources for homebuyers.

For an adjustable-rate mortgage (ARM), what are the index and margin, and how do they work?

For an adjustable-rate mortgage, the index is an interest rate that fluctuates periodically based on general market conditions. The margin is a number set by your lender when you apply for your loan. When your initial teaser rate expires, the index and margin are added together to become your new interest rate, subject to any rate caps.

With an adjustable-rate mortgage, the initial teaser rate is generally only for the first few years, and then it begins to adjust periodically. Once the rate begins to adjust, the changes to your interest rate (and payments) are based on the market, not your personal financial situation.

To calculate your new interest rate when it’s time for it to adjust, lenders use two numbers: the index and the margin.

Tip

You should pay attention to the margin when you’re shopping for your loan because it can vary a lot between different lenders. You can also negotiate the margin just like you would negotiate the rate on a fixed-rate loan.

Index + Margin = Your Interest Rate (subject to any rate caps)

The index is an interest rate that fluctuates with general market conditions. Changes in the index, along with your loan’s margin, determine the changes to the interest rate and your payments for an adjustable-rate mortgage loan. If interest rates go up, your payments will go up, so these loans have future risks that other loans do not. The lender decides which index your loan will use when you apply for the loan, and this choice generally won’t change after closing.

The margin is the number of percentage points added to the index by the mortgage lender to set your interest rate on an adjustable-rate mortgage (ARM) after the initial rate period ends. The margin is set in your loan agreement and won't change after closing. The margin amount depends on the particular lender and loan.

The fully indexed rate is equal to the margin plus the index.

Margins and indexes are two of many terms that determine your monthly payment for an adjustable-rate mortgage. It’s also important to understand caps, carryover, and other terms. If you’re considering an adjustable rate mortgage, read the Consumer Handbook on Adjustable Rate Mortgages (CHARM) booklet.

What are rate caps with an adjustable-rate mortgage (ARM), and how do they work?

Adjustable-rate mortgages (ARMs) typically include several kinds of caps that control how your interest rate can adjust up or down.

There are three kinds of caps:

  1. Initial adjustment cap. This cap says how much the interest rate can increase or decrease the first time it adjusts, after the fixed-rate period expires. It’s common for this cap to be either two or five percent – meaning that, after the first rate change, the new rate can’t be more than two (or five) percentage points higher or lower than the initial rate during the fixed-rate period.
  2. Subsequent adjustment cap. This cap says how much the interest rate can increase or decrease in the adjustment periods that follow. This cap is most commonly one or two percent, meaning that the new rate can’t be more than one or two percentage points higher or lower than the previous rate.
  3. Lifetime adjustment cap. This cap says how much the interest rate can increase or decrease in total, over the life of the loan. This cap is most commonly five percent, meaning that the rate can never be more than five percentage points either higher or lower from the initial rate. However, some loans may have a higher cap. Additionally, some loans may have a lifetime adjustment cap for decreases that is different than that of increases, known as a floor.

Tip

Compare rate caps when comparing ARMs. Two different lenders may have the same initial interest rate but offer different rate caps. Even if you think you’ll move or refinance before the adjustable period starts, it’s a good idea to know how much your rate can change.

Ask the lender to calculate the highest payment you may ever have to pay on the loan you are considering. You can also find this information on your Loan Estimate or Truth-in-Lending disclosure, which lenders are required to provide you within three business days after you apply for a loan.

If you’re behind on your mortgage, or having a hard time making payments, you can call the CFPB at (855) 411-CFPB (2372) to be connected to a HUD-approved housing counselor today. You can also use the CFPB's "Find a Counselor" tool to get a list of U.S. Department of Housing and Urban Development (HUD)-approved counseling agencies in your area.

If you have a problem with your mortgage, you can submit a complaint to the CFPB online or by calling (855) 411-CFPB (2372).

If I am considering an adjustable-rate mortgage (ARM), what should I look out for in the fine print?

If you are considering an ARM, make sure to read the terms carefully and ask lots of questions until you understand exactly how each of these features of the mortgage works.

Adjustable rate mortgages can be very complicated. There are many parts to an adjustable rate mortgage that can affect how much the mortgage will cost you.

Here are key questions to ask your lender about your loan

When and how often will the interest rate be adjusted?

Most adjustable-rate mortgages have fixed interest rates for an initial period–for example, 3 or 5 years–and are typically re-calculated once per year after that. But this structure is not required. Some loans don’t have an initial fixed-rate period, and they can adjust more or less frequently. Make sure you understand exactly how often the rate on your loan will re-adjust.

What is the index and margin on the loan?

The index and margin control what your interest rate will be at each adjustment for an adjustable-rate mortgage. Learn more about indexes and margins and how they work.

What are the rate caps on the loan?

The rate caps control the maximum amount your interest rate can change at each adjustment, and in total, over the life of the loan. Learn more about rate caps and how they work.

Will the payment be recalculated at the same time as the interest rate?

For most loans, the payment is recalculated each time the interest rate adjusts. However, some loans may recalculate the payment amount less frequently. If your interest rate has increased but your payment has not, your loan balance could increase.

Can your loan balance increase?

Sometimes the balance of a loan can actually increase rather than decrease even though you are making payments on the mortgage. For example, your loan balance might increase if your monthly payment is not enough to cover the interest on your loan. Check to see whether the balance on your loan is allowed to increase after closing. These types of loans are called negative amortization loans. Learn more about negative amortization loans

Does the loan have a floor rate? If the interest rate adjusts up, can it adjust back down in a future period?

Some loans have a “floor rate,” or a minimum rate. Even if the index goes lower, the rate on these loans does not adjust below the floor rate. Loans can also have a clause that says that the interest rate can only ever adjust up, not down. Both of these features can make the loan more expensive and risky for you, by increasing the chance that your payments will go up in the future. If you are considering a loan with either of these features, ask the lender what benefit you would get for accepting these terms. Ask for a quote for a similar loan without these features, so you can make an informed decision.

Does the loan have a prepayment penalty?

Check to see if there is a fee for paying your loan back early. Most loans do not have prepayment penalties, but it’s a good idea to double-check. Learn more about prepayment penalties.

If you have a problem with your mortgage, you can submit a complaint to the CFPB online or by calling (855) 411-CFPB (2372).

I received notice of an upcoming rate change on my adjustable-rate mortgage (ARM). Why did I receive this and what should I do now?

Generally, if you have an adjustable-rate mortgage (ARM), your mortgage servicer is required to send you an estimate of your new payment.

If your interest rate is being reset for the first time, your lender must send you the estimate seven to eight months before your first payment at the new rate is due.

If you have an ARM that has already reset once, you will be notified two to four months before the first payment at the new rate is due if the next reset is going to change your payment amount.

This advance notice is designed to give you time to budget for your new payment or shop for a different home loan.

The advance notification of your rate change needs to show, among other things:

  • The current and new interest rates (or an estimate, if appropriate)
  • The current and new payment amounts
  • The date the first new payment is due

For the notification that comes seven to eight months before your first rate reset, your lender must also include:

Before your rate changes, there are different steps you can take depending on your situation:

  • Budget for your new payment
  • Shop for a better loan
  • Find help from a HUD-approved housing counseling agency to evaluate your options

Tip: To find an agency, visit our housing counselor locator or call HUD's housing counselor referral line at (800) 569-4287.

If you have a problem with your mortgage, you can submit a complaint with the CFPB online or by calling (855) 411-CFPB (2372).

Sources and further reading

The CFPB source passages are U.S. government work in the public domain. Fynoptic has selected, organized, and adapted the material for this guide, including corrections identified through the additional sources listed above. Sources accessed October 27, 2026. This use does not imply agency endorsement or affiliation.

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