Adjustable-rate mortgage (ARM)
National Real Estate Exam glossary · Valuation
Definition
A loan whose interest rate periodically adjusts to a chosen index plus a margin, shifting interest-rate risk to the borrower. Rate caps limit how much the rate may change per adjustment and over the life of the loan.
Adjustable-rate mortgage (ARM) in plain English
With most home loans the interest rate is locked, so your payment never changes. An adjustable-rate mortgage (ARM) instead lets the rate move up or down over time, tied to some public interest-rate benchmark (the "index") plus a fixed extra amount the lender adds on (the "margin"). The gamble is on you: if rates in the economy climb, your payment climbs too, which is why it's called shifting the risk to the borrower. To keep it from spiraling, ARMs include caps that limit how much the rate can jump in one adjustment and across the whole life of the loan.
Also called: ARM
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