An adjustable rate mortgage, ARM, is a mortgage that has a varying interest rate on the note.
For a lot of people this can be a very attractive option.
The interest rate on the mortgage periodically adjusts based on an index.
Because of the varying interest rate, borrowers may notice their payments changing over time.
Adjustable rate mortgages are sometimes confused with graduated payment mortgages. With a graduated payment mortgage the interest rate remains fixed while the payment amounts change.
With adjustable rate mortgages much of the interest rate risk is transferred from the lender to the borrower. Borrowers benefit when interest rates on the mortgage fall. On the other hand, borrowers lose out when interest rates rise. Usually the loans are available when fixed rate mortgages are more difficult to obtain.
Key Terminology
Index – the guide used by lenders to measure changes in the interest. Each adjustable rate mortgage is linked to an index.
Margin – the part of the interest rate from which the lenders profits. The margin plus the index rate is the total interest rate. While the index will change...
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