An ARM may have an initial fixed rate period followed by a variable period, as shown in Figure 1. For example, a 5/1 ARM would have a fixed rate for the first five years, then reset every year afterwards. Most ARMs are quoted with limits on how much the rate can reset in any given year, as well as a limit on the amount the rate could rise or fall over the life of the loan.
ARMs are usually linked to a published index, such as the yield on 1 year maturity United States Treasury securities. These rates have fluctuated widely over the years, as shown in Figure 2.
