An adjustable-rate mortgage (ARM) is a type of home loan with an interest rate that fluctuates periodically based on an index, reflecting the cost to the lender of borrowing on the credit markets. This means that the monthly payments can go up or down, depending on economic factors. ARMs typically have a lower initial interest rate than fixed-rate mortgages, making them an attractive option for borrowers hoping to enjoy the lowest possible interest rate. However, after the initial period, the monthly payment can fluctuate periodically, making it difficult to factor into ones budget. ARMs are also known as variable-rate mortgages and have caps that limit how much the interest rate and/or payments can rise per year or over the lifetime of the loan. Its important to note that ARMs involve a more complex structure that could be difficult to understand, and the interest rate and monthly payments might rise to an unaffordable level, even with the cap limit.
In summary, an adjustable-rate mortgage is a home loan with an interest rate that changes periodically, offering lower initial rates but with the potential for fluctuating payments over time.
