Business, Legal & Accounting Glossary
A mortgage loan with an interest rate that fluctuates in accordance with a designated market indicator — such as the weekly average of one-year U.S. Treasury Bills — over the life of the loan. To avoid constant and drastic fluctuations, ARMs typically limit how often and by how much the interest rate can vary.
An adjustable-rate mortgage (ARM) is a type of mortgage on which the interest rate is typically changed by a lender after a predetermined initial time period.
The term of the adjustable-rate mortgage consists of two phases. During the early phase of the term, the adjustable-rate mortgage has a fixed rate of interest. After that, the interest rate of the adjustable-rate mortgage is altered by the lender. Unlike an FRM (fixed-rate mortgage), an adjustable-rate mortgage interest stability is limited to ten years. Thus, a five-year adjustable-rate mortgage will offer a fixed rate for five years. Although lenders are authorized to make rate changes in the adjustable-rate mortgage, they do so based on pre-selected interest rate indexes such as LIBOR. In the United States lenders have no discretion over rate changes in ARMs, since every adjustable-rate mortgage is tied to an index. Most lenders offer a low introductory rate. Therefore, the interest rate of the adjustable-rate mortgage is usually adjusted upward.
An adjustable-rate mortgage or ARM is a mortgage that has an interest rate that changes over time. Typically, the rate is tied to a publicly available rate such as the London Interbank Offered Rate (LIBOR).
To encourage borrowers to sign a loan application, some ARMs can and do use teaser interest rates as a come-on. This is an interest rate that initially is well below-market interest rates. However, the rate expires after a specified period, and the rate resets to the one calculated as specified in the contract.
Teaser rates can be loss leaders. Many have been attracted to mortgages they cannot afford once the ARM resets. Previously they could refinance at a lower interest rate using the equity accumulated in their property while housing prices were rising quickly. But declines in housing values have caused many to lose what little equity they had and sometimes to lose their homes in foreclosure.
Those who borrow with ARMs should be careful to fully understand the formula used to calculate the interest rate and the monthly payments required once the teaser rater rate expires.
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This glossary post was last updated: 4th August, 2021 | 0 Views.