Adjustable-Rate Mortgage (ARM)

Adjustable-Rate Mortgage (ARM) – A mortgage loan that has an interest rate that moves with the market. The rate on this type of loan is tied to an index, typically, US Treasuries or LIBOR.

  • Example: A borrower may use an adjustable rate mortgage to keep their monthly payment lower in the short term. A mortgage rate is determined by a spread plus an index. The spread is the lenders “profit”. In an adjustable rate mortgage, the lender has protection against future interest rate increase because the rate of the mortgage floats with the rate of the index. Therefore, the lenders spread does not need to be as high as it would on a fixed rate mortgage.
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