Definition: An ARM is a mortgage whose interest rate can change under the loan’s stated adjustment rules. Adjustments generally use an index plus a margin, subject to any applicable caps or floors.
Example
A loan’s adjustment formula uses a 4% index plus a 2% margin. The calculated rate is 6% before applying the contract’s adjustment limits.
Keep the distinction clear
A low introductory rate may not last. Check the first adjustment date, later adjustment frequency, index, margin, and rate caps. Rate changes follow the contract; they are not simply any rate the lender chooses.
Related terms
Interest · Annual Percentage Rate (APR) · Amortized Mortgage
Keep studying
Mortgage Payment Factors: Calculate Principal and Interest
References: CFPB: Adjustable-rate mortgage terms
Pronunciation (US): uh-JUS-tuh-buhl RAYT MOR-gij; ARM: arm (capitals show stress)
Pronunciation reference: Merriam-Webster
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