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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.
Related Terms
Interest Rate
A percentage of a loan or deposit balance that is charged by a lender or financial institution for the use of its money.
APR
APR, or annual percentage rate, is a measure of the cost of borrowing money that includes the interest rate and other charges as a yearly rate.
Home Equity Loan
A type of loan in which a homeowner borrows against the equity in their property, typically at a fixed interest rate and for a fixed term.