Adjustable-rate mortgage
A mortgage whose interest rate is fixed for a starting period, then changes on a schedule based on a market index plus a margin.
An ARM is often named by two numbers. In a 5/1 ARM, the rate holds for 5 years, then adjusts once a year. When it adjusts, the new rate is the index plus the lender's margin.
Caps limit how far the rate can move at the first change, at each later change and over the life of the loan. Before choosing one, find the highest payment the caps allow.
Example
A loan starting at 5.75% with a 5-point lifetime cap can never go above 5.75% + 5 = 10.75%.