ARMs start with an initial fixed-rate period where the interest rate does not change. This period can last from 1 to 10 years, depending on the specific ARM product. Common types include 3/1, 5/1, 7/1, and 10/1 ARMs, where the first number indicates the years the rate remains fixed, and the second number signifies how often the rate adjusts after the initial period (annually in these examples).

After the initial fixed period, the interest rate adjusts at predetermined intervals. The adjustment is based on a benchmark interest rate or index plus a set margin. Common indices include the London Interbank Offered Rate (LIBOR), the Cost of Funds Index (COFI), and the Secured Overnight Financing Rate (SOFR).

To protect borrowers from drastic increases in payments, ARMs typically have rate caps that limit how much the interest rate can change during each adjustment period and over the life of the loan. These caps are defined in the loan agreement.

With an ARM, the monthly mortgage payment can increase or decrease as the interest rate changes, affecting the amount of interest paid over the life of the loan and the total loan cost.