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Adjustable-Rate Mortgage (ARM)

Adjustable rate mortgages change their interest rates at predetermined time intervals (6 month or 1 year is typical). This change in rate may or may not change the monthly payment, depending on what was agreed to prior to accepting signing up for the Mortgage. The interest rate is usually tied to the banks source of funds, often called the one year treasury index. The better mortgages have caps on how much the interest rate can go up in any one year and/or over its lifetime. These caps also apply to the payment. Monthly payments are calculated as if the loan were to last 30 years (amortization), doing so keeps the loan payments lower. Typically interest rates and monthly payments are lower than 30 year fixed rate mortgages for the first couple of years. If interest rates stay low, you can be a winner, if interest rates increase, your monthly payments can increase higher than a 30 year fixed rate mortgage.

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