Adjustable Rate Mortgage

An Adjustable Rate Mortgage, or ARM, is a mortgage whereby the interest rate on the loan can change over the term of the loan.  Since the interest rate can change with an adjustable rate mortgage, the monthly payments on the loan can rise or fall over the term of the loan.  This behavior is in contrast to the fixed rate mortgage, whereby the interest rate is fixed over the term of the loan.

Comparisons between adjustable rate mortgages can be made using the annual percentage rate, or APR.  Since the risk of rising or falling interest rates is passed on to the borrower with an ARM, the cost of the loan in terms of its interest rate is usually lower than a fixed rate mortgage.