1 Year, 3/1 and 7/1 ARMs Adjustable-rate Mortgages, or ARMs, offer an interest rate that is adjustable throughout the entire life of the loan, and down payments change accordingly. ARMs offer an initial interest rate that's usually about 2% lower than fixed-rate. A good ARM has limits, or caps, that prevent the payments from increasing or decreasing beyond a predetermined amount. The interest rate of an ARM is determined by an index of current interest rates , and adjusted at specific, predetermined periods. 1-Year ARM With this loan, your interest rate adjustment period occurs every year, on the one-year anniversary of your loan. 3/1 ARM This is a hybrid version of a 1-year ARM. The interest rate stays the same for the first three years, and then the loan turns into a 1-year arm. This gives you the advantage of a stable payment and rate for an extended time period, followed by the lower rates and indexes of a 1-year ARM. 7/1 ARM This works just like a 3/1 ARM, except the interest rate remains the same for the first seven years before turns into a 1-year ARM.