How does a 3/1 adjustable rate mortgage work?

A 3/1 adjustable rate mortgage is a commonly used loan product for subprime buyers or for buyers looking to move within the first 3 years. The mortgage will have a fixed rate for three years. Upon the fourth year, the rate will adjust, and therefore, the payment will adjust. It can go up or down depending on market rates. The 3/1 ARM allows the rate to change once per year after the initial three years. Check with your lender to see if there is a cap on the number of times it can adjust.