Adjustable Rate Mortgage (ARM)

A home loan with an interest rate that is fixed for a certain period, after which it may fluctuate with the market.

More Details

An adjustable rate mortgage (ARM) is a type of home loan in which the interest rate is adjusted periodically based on the movement of a financial index. The interest rate on an ARM is typically lower than the interest rate on a fixed-rate mortgage in the initial years of the loan, making it an attractive option for borrowers who plan to sell their home or refinance their mortgage before the interest rate adjusts.

Example

You might take out a 3/1 ARM with an initial interest rate of 3.5%. This means that the interest rate on the loan would be fixed at 3.5% for the first three years, after which it would adjust annually based on the movement of the chosen index. If the index increased by 1% after the initial fixed period, the interest rate on the loan would increase to 4.5% for the next year.

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