mortgage agreement between a financial institution and a real estate buyer stipulating predetermined adjustments of the interest rate at specified intervals. Mortgage payments are tied to some index outside the control of the bank or savings and loan institution, such as the interest rates on U.S. Treasury bills or the average national mortgage rate. Adjustments are made regularly, usually at intervals of one, three, or five years. In return for taking some of the risk of a rise in interest rates, borrowers get lower rates at the beginning of the ARM than they would if they took out a fixed rate mortgage covering the same term. A homeowner who is worried about sharply rising interest rates should probably choose a fixed rate mortgage, whereas one who thinks rates will rise modestly, stay stable, or fall should choose an adjustable rate mortgage. Critics of ARMs charge that these mortgages entice young homeowners to undertake potentially onerous commitments.
Also called a Variable Rate Mortgage (VRM), the ARM should not be confused with the Graduated-Payment Mortgage, which is issued at a fixed rate with monthly payments designed to increase as the borrower's income grows.
mortgage agreement that provides initial monthly payments of a relatively low amount (compared with a fixed rate mortgage). This initial amount is subject to periodic changes based on a stipulated index. Index usually used is the change in the rates of United States Treasury bills. Homebuyers considering an ARM should compare ARMs offered by the various lending institutions in the following manner: (1) first-year rates; (2) how the interest rate is calculated in future years; (3) what the one-year and lifetime caps are on the maximum rate; and (4) rules for conversion to a fixed rate mortgage.
