An adjustable rate mortgage (ARM) is a mortgage loan whose interest rate is adjusted periodically based on certain parameters (as described below). The 5-year and 7-year adjustable rate mortgages are the most common although other terms are often available (from 3 to 10 years).
Basic Elements of ARMs
- Initial rate: The preliminary interest rate.
- The adjustment period: The period in which the current rate will remain consistent.
- The index rate: The future rate changes are based off a variety of indices such as the LIBOR.
- The margin: The percentage which gets added to the index rate to determine the adjusted interest rate.
- Interest rate cap: The percentage of change which can be added to or deducted from your current rate.
- Ceiling: The highest interest rate permitted during the life of the loan.