ARM (Adjustable Rate Mortgage)

Last modified December 3, 2021

An ARM is an Adjustable Rate Mortgage. It is a loan in which the interest rate, and the payment, changes over the life of the loan. The interest rate is adjusted to match the rise and fall of a pre-selected index (Treasury Index, Libor (London Interbank Offered Rate etc...and the borrower's payments will increase and decrease accordingly. There are different caps on the rate increases depending on the loan program. Different ARMs are adjusted at different frequencies. Some ARMs have limits on how much interest rates and payments may change at each adjustment, as well as on the maximum interest rate. The starting interest rate on ARM loans is usually low, which permits you to purchase a home that might otherwise be unaffordable with fixed-rate mortgage. However, there is always a risk of higher payments later on. An ARM can be an attractive arrangement for people who plan on being in the home for five years or less, or if the buyer thinks that interest rates will be coming down.