Adjustable-Rate Mortgage (ARM)

An adjustable-rate mortgage has a fixed rate for an opening period, then resets at set intervals to an index plus a margin. BRRRR investors sometimes choose one for the refinance to get a lower starting payment, accepting the risk that cash flow shrinks when the rate adjusts.

A 5/1 ARM, for example, is fixed for five years and then adjusts every year. The note sets caps on how far each reset and the lifetime rate can move. To see the exposure, run the numbers at the highest rate the caps allow.

Suppose the default refinance were an ARM that jumped to 9% in year six. About $353,900 would still be owed, and repaying it over the last 25 years pushes the monthly payment from $2,558 up to around $2,970. With cash flow of about $161 a month at the original rate, that increase would turn the property negative. An ARM fits best when the rent has plenty of room above the payment.

Further reading: Adjustable-Rate Mortgage (ARM) on Wikipedia.