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Adjustable Rate Mortgage

An adjustable-rate mortgage (ARM), sometimes called a variable-rate mortgage (VRM), is a home loan with an interest rate that varies in relation to an index rate, resulting in payments that rise and fall with interest rates. With an ARM, after an initial time period with a fixed rate, interest rates and payments are adjusted at specified times, often every year, three years, or five years. For example, a loan referred to as a 3/1 ARM is an adjustable-rate mortgage with an interest rate that is fixed for an initial period of three years, then changes based on the index rate every year following that period.

ARMs often offer lower initial interest rates than fixed-rate mortgages, but they also involve greater risk to the borrower, as rates could rise or fall, resulting in unpredictable future payments.