Adjustable Rate Mortgage
A general term for any mortgage in which the interest rate and generally the payments change over the life of the loan. Your interest rate will be adjusted to match the rise or fall of a preselected interest rate index and your regular payments will increase or decrease accordingly.
Different types of ARMs have different frequencies for these adjustments. Some ARMs have limits on payment and interest rate changes and the maximum interest rate over the life of your loan.
To your advantage, the initial rate of an ARM is usually low, permitting you to buy real estate that would be unaffordable with a fixed rate mortgage. But you risk higher payments later on.
To limit the borrower’s risk, the ARM may have a payment or rate cap.