A loan with an adjustable interest rate.
An ARM is a loan with an adjustable interest rate. Unlike a fixed-rate mortgage, an ARM (Adjustable Rate Mortgage) is a type of loan characterized by interest rates that automatically adjust or fluctuate based on specific market indexes.
An adjustable-rate mortgage will have terms associated with it, such as index, margin, and caps. Generally, an ARM begins with an introductory or initial interest rate that is fixed for a period such as 5, 7, or 10 years. After the fixed period, the rate will adjust based on current rates but will not exceed the ‘periodic’ or ’life’ caps associated with the loan. The "Adjustment Period" associated with the ARM loan determines how frequently the interest rate can adjust.