An ARM is an adjustable rate mortgage. ARM mortgages generally have an initial fixed rate period of 3, 5, 7 or 10 years. After the initial fixed period, the interest rate begins to adjust yearly based on the yield of the 1 year T-bill or LIBOR indexes. An ARM involves interest rate risk for borrowers because the rate varies based on the lender's cost of money.

Most borrowers that take ARM loans intend to live in their home for a shorter period of time, or intend to pay the loan down aggressively at some point. Once the loan begins to adjust, the payment calculates based on the new principal balance and the remaining term of the loan. Pre-paying an ARM loan can significantly reduce the payment at each change date.

Jumbo ARM loans are adjustable rate mortgages that exceed Fannie Mae or Freddie Mac loan limits. People purchasing or refinancing a higher priced home for a short period of time might consider a jumbo ARM. The terms of a Jumbo ARM are similar to Fannie Mae ARM loans except that the loan amounts are higher.