How is an ARM different from a regular variable mortgage?

With an ARM, your payment changes when prime changes. With a fixed-payment variable mortgage, the payment stays the same and the split between principal and interest shifts instead.

Can an ARM lead to negative amortization?

Generally no. Because the payment adjusts to match the rate, an ARM keeps your amortization on track and avoids the trigger-rate and negative-amortization risks of fixed-payment variable mortgages.

Who is an ARM best suited to?

Borrowers who want a variable rate and steady progress on principal, and who have room in their budget to handle payments that rise and fall with prime, often prefer an ARM.

Mortgage Glossary

What is Adjustable-Rate Mortgage (ARM)?

An adjustable-rate mortgage (ARM) is a type of variable-rate mortgage where your actual payment goes up or down when the lender's prime rate changes. Unlike a fixed-payment variable mortgage, the payment itself adjusts, so more or less of each payment goes to principal as rates move. This keeps your amortization on track but makes your payment less predictable.

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Quick answer

Also known as: ARM, adjustable rate mortgage

Key points

An ARM is a variable mortgage where the payment changes when prime changes.
It differs from a fixed-payment variable mortgage, where the payment stays flat.
Adjusting the payment keeps your amortization on schedule.
It avoids trigger-rate and negative-amortization risk.
It trades payment predictability for stable principal paydown.
When prime rises your payment rises; when prime falls your payment falls.

Adjustable-Rate Mortgage (ARM) explained

An adjustable-rate mortgage is a variable mortgage in which both the interest rate and the payment amount move with the lender's prime rate. When prime rises, your payment rises; when prime falls, your payment falls. Because the payment adjusts to match the rate, the share going to principal stays roughly as planned and your amortization does not stretch out.

This differs from a fixed-payment variable mortgage, where the payment stays the same even as rates change. In that fixed-payment version, a rate increase sends more of the payment to interest and less to principal, which can lead to a trigger rate or negative amortization. An ARM avoids that by adjusting the payment instead, trading payment stability for a stable amortization schedule.

What a Adjustable-Rate Mortgage (ARM) is for

An ARM is for borrowers who want their mortgage to track market rates and keep their amortization on schedule rather than holding a fixed payment. It ensures that, as rates change, the loan continues to pay down as planned, avoiding the risk of the balance growing. It suits people who can absorb fluctuating payments in exchange for steady progress on principal.

How it can help you

Understanding an ARM helps you choose between payment stability and amortization stability, two different trade-offs within the variable world. If you prefer to avoid trigger-rate and negative-amortization risk, an ARM may suit you, though your payment will move. Lenderoo shops 40+ lenders for free, so you can compare adjustable, fixed-payment variable, and fixed-rate options side by side.

When it comes up

An ARM comes into play when you want a variable rate but do not want your balance to grow if rates spike. A borrower with room in their budget might choose an ARM so that rising rates lift their payment but keep their payoff date intact, rather than risk hitting a trigger rate on a fixed-payment variable mortgage.

Example: When prime rises

Suppose you hold an adjustable-rate mortgage and the lender's prime rate increases by 0.5%. With an ARM, your monthly payment rises right away to reflect the higher rate, so the portion going to principal stays roughly on plan.

Had you instead held a fixed-payment variable mortgage, your payment would not change, but more of it would go to interest and less to principal, potentially pushing you toward a trigger rate. The ARM keeps your amortization on track by adjusting the payment, while the fixed-payment version keeps the payment steady at the cost of slower principal paydown.

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Questions & answers

Adjustable-Rate Mortgage (ARM): frequently asked questions

Common questions Canadians ask about adjustable-rate mortgage (arm).

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