Finance Dictionary
Adjustable-Rate Mortgage (ARM)
Definition
A type of mortgage in which the interest rate applied on the outstanding balance varies throughout the life of the loan.
Deep Dive
An Adjustable-Rate Mortgage (ARM) is a type of home loan where the interest rate on the outstanding balance is not fixed but can change over the life of the loan. ARMs typically begin with an initial period during which the interest rate is fixed, often for 3, 5, 7, or 10 years. After this initial period, the rate adjusts periodically—usually annually—based on a predetermined financial index plus a lender-specified margin.
Examples & Use Cases
- 1A borrower takes out a 5/1 ARM, meaning their interest rate is fixed for the first five years, then adjusts annually based on the LIBOR index plus 2%
- 2A homeowner choosing an ARM because they anticipate selling their house within the 7-year fixed-rate period, hoping to benefit from lower initial rates
- 3Rising market interest rates cause an ARM borrower's monthly payment to increase by $300 after their initial fixed period expires.
Related Terms
Fixed-Rate MortgageInterest RateMortgageIndex Rate