Adjustable Rate Mortgages (ARM)

Variable or adjustable loans are loans whose interest rate, and accordingly monthly payments, fluctuate over the period of the loan. With this type of mortgage, periodic adjustments based on changes in a defined index are made to the interest rate. The index for your particular loan is established at the time of application.

The margin is fixed percentage points added to the index to compute the interest rate. The margins remain fixed for the term of the loan and are not impacted by the financial markets and movement of interest rates. Lenders use a variety of margins depending upon the loan program and adjustment periods.

Most ARMs have an interest rate cap to protect you from enormous increases in monthly payments. A lifetime cap limits the interest rate increase over the life of the loan. A periodic or adjustment cap limits how much your interest rate can rise at one time. Your mortgage disclosure will tell you the exact index, to be used, whether the weekly or monthly value applies, the lead time for your index, the margin, and any caps.