adjustable-rate mortgage (ARM) definition

In simplest terms, an adjustable rate mortgage, or ARM, is a home loan that begins with an attractive interest rate that is fixed for a period of time, three to five years, for example, and then adjusts annually, up or down, depending on a calculation based on specific financial indexes.

Mortgage lenders developed this kind of mortgage product for competitive purposes, to help home purchasers qualify for a larger mortgage than they would have with a traditional 30-year fixed rate mortgage.

An ARM can be beneficial for some home purchasers, but can also become a problem if interest rate increases create an adjusted payment beyond which the mortgagor can afford to pay. The relatively complex language of ARM documents warrants careful scrutiny with competent assistance..