The period is the span of time that a lender must wait before it can readjust the interest rate of the ARM loan. The lender may only change the interest rate on a loan once each period, normally on the anniversary date of each period. The exception are ARM loans based on the prime rate, which normally have no set period. This is the case with many credit cards, business loans and commercial loans. The prime rate is adjusted by banks, according to overall market conditions. The prime rate may not change for two years in a row; then it may increase five times in one month. Typical periods can range from one month to several years, with one-year ARM periods being the most common.
Generally speaking, ARMs with shorter periods usually provide lower interest rates, since shorter periods give the lender more opportunities to adjust the interest rate—and thus further lower the lender’s overall risk exposure.
Do not confuse the loan term or amortization with the period. A 30-year amortization is the norm for all ARM loans, although shorter amortization settings and terms are also available. Note that similar to the conventional fixed-rate loan, the ARM loan’s term and amortization are the same.
For example, a 3/1 ARM is basically a one-year ARM loan with one-year periods. However, for the first three years, the ARM loan’s rate is fixed (will NOT adjust). After the third year, the ARM loan’s rate will begin adjusting as normal. The 2-year/6-month ARM is primarily used by non-conforming loan programs.