What is ARM?
An Adjustable-Rate Mortgage (ARM) is a type of home loan where the interest rate can fluctuate over time. With an ARM, the starting interest rate is fixed for a certain length of time. Following that, the interest rate applied to the outstanding debt is reset regularly, such as once a year or even monthly. ARMs are alternatively referred to as variable-rate mortgages or floating mortgages. The interest rate for ARMs is adjusted using a benchmark or index plus an extra spread known as an ARM margin. The London Interbank Offered Rate (LIBOR) was the standard index for ARMs until October 2020, when it was replaced by the Secured Overnight Financing Rate (SOFR) to boost long-term liquidity.
Geeky Takeaways:
- An adjustable-rate mortgage is a type of house loan in which the interest rate fluctuates regularly based on the performance of a certain benchmark.
- ARMs are sometimes known as variable-rate or floating mortgages.
- ARMs typically feature limitations that limit how much the interest rate and/or payments may climb each year or during the loan’s term.
- An ARM might be a wise financial decision for purchasers who want to maintain the loan for a short amount of time and can afford any possible interest rate hikes.
Table of Content
- Types of Adjustable Rate Mortgages (ARMs)
- Advantages of Adjustable Rate Mortgage (ARM)
- Disadvantages of Adjustable Rate Mortgage (ARM)
- ARM vs Fixed Interest Rate: What to Choose?
- Adjustable Rate Mortgage (ARM)- FAQs