Adjustable-Rate Mortgage (ARM)

An adjustable-rate mortgage has an interest rate that is fixed for an opening period and then resets on a schedule to an index plus a margin. Many DSCR lenders offer ARMs next to 30-year fixed loans, and the lower opening rate usually produces a higher starting ratio.

Each reset changes the payment, so it changes the DSCR too. On the $375,000 loan in the site example, the ratio is 1.20 at 7.5%. If the rate reset to 9.5% after five years, the payment on the remaining balance would rise from $2,622 to about $3,100, and the ratio would drop to roughly 1.05 with the same $4,000 rent.

Lenders qualify the loan at the start rate, but the property has to carry the payment after every reset. Run the calculator at the rate cap in the note as well as the start rate. If the property still covers the payment at the cap, the reset risk is manageable.

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