UK Accounting Glossary
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.
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This glossary post was last updated: 4th February 2020.