adjustable-rate mortgage - Investment & Finance Definition
A mortgage with an interest rate that will rise or fall over time as interest rates fluctuate. The interest rate of an ARM, as they are frequently referred to, will change every year, every 3 years, or every 5 years. Lenders peg the interest rate on an ARM to an index. For example, a lender might use as a benchmark the interest rates that Treasury bills are paying for the equivalent time frame or a national or regional average cost of funds; alternatively, the lender may develop its own index. Thanks to low interest rates, adjustable-rate mortgages have grown in popularity in recent years, enabling people to buy homes that they normally couldn’t afford. If interest rates rise, however, the monthly payment of an ARM will rise in kind.