adjustable-rate mortgage

(ə-jŭst'ə-bəl-rāt')
n. (Abbr. ARM)
A mortgage whose interest rate is raised or lowered at periodic intervals according to the prevailing interest rates in the market. Also called variable-rate mortgage.

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A very popular family of RISC-based microprocessors and microcontrollers from ARM Inc., Cambridge, England (www.arm.com). The company was founded as Advanced RISC Machines in 1990 by Acorn Computers, Apple and VLSI Technology.

ARM chips are medium to high-speed CPUs that are known for their small die size and low power requirements. Manufactured under license by more than a dozen semiconductor companies, ARM chips are used in smartphones, games, e-book readers, tablets, netbooks, TVs and myriad other consumer and industrial products. In 2010, ARM's CEO stated that licensees of the company sell approximately four billion ARM chips a year.

ARM, Cortex and SecurCore

ARM processor families are designated by the prefix "ARM" and a digit, such as ARM7, ARM9 and ARM11 or with names such as Cortex and SecurCore, the latter used for secure identification products such as smart cards.

StrongARM

The StrongARM was a high-speed version of the ARM chip that was jointly developed with and for Digital Equipment Corporation. The SA-100, the first StrongARM chip, was delivered in 1995, and Intel acquired the technology from Digital in 1997. See StrongARM and Thumb.

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Residential mortgage in which the interest rate floats up or down according to changes in an index rate. Adjustable-rate mortgages usually have lower initial interest rates than fixed-rate mortgages, so there is an opportunity for substantial interest savings over the life of the loan if rates remain steady or decline. Adjustable-rate mortgages first appeared in the 1960s but did not gain wide popularity until the 1980s, when lenders began promoting ARM loans as a low-cost alternative to thirty-year, fixed-rate mortgage loans. ARMs are structured with built-in limits, called interest-rate caps, to cushion the impact of interest-rate fluctuations on loan payments in any year or over the life of the loan. An adjustable-rate mortgage with an initial rate of 41⁄2%, an annual cap of 1%, and a lifetime cap of 4% will have an interest rate no higher than 91⁄2%. ARM rates are usually adjusted every six months or once a year, depending on the type of loan. Loan payment caps do not limit the amount of interest the lender is earning, which means an ATM loan may cause Negative Amortization if the accrued loan interest exceeds the interest actually paid.

When computing the loan interest rate, the lender adds a margin to an index rate selected as the benchmark, or base rate. The most common indexes are the Constant Maturity Treasury (CMT) Index of Treasury issues with the same final maturity; the Treasury Bill index, based on the current auction yield of 3-month, 6-month or 1-year Treasury bills; the 12-month Moving Treasury Average, computed from the Treasury CMT index for the previous 12 months; the 11th District Cost of Funds Index, the weighted average cost of savings accounts, Federal Home Loan Bank advances, and other sources of funds paid by savings institutions in the 11th Federal Home Loan Bank district; the London Interbank Offered Rate (Libor), the rate major London banks charge each other for borrowings; the certificate of deposit (CD) index, the average rate earned by nationally traded certificates of deposit; and the bank Prime Rate, the rate banks charge their prime business borrowers. The most popular are the Treasury indexes, the 11th District Cost of Funds Index, and the LIBOR index. A popular variation of the adjustable-rate mortgage is the HYBRID ARM, in which the loan has a fixed interest rate for 3 to 10 years and thereafter adjusts according to market conditions. See also Alternative Mortgage Instrument.

A mortgage loan whose interest rate fluctuates according to another rate. Commonly, the mortgage rate is indexed (adjusted) annually based on the one-year Treasury bill rate, plus a 2% margin.


Example: A person obtains an adjustable-rate mortgage to finance the purchase of a home. At one-year intervals, the lender may adjust the rate of interest on the loan in accordance with an established index.

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A type of mortgage in which the interest rate paid on the outstanding balance varies according to a specific benchmark. The initial interest rate is normally fixed for a period of time after which it is reset periodically, often every month. The interest rate paid by the borrower will be based on a benchmark plus an additional spread, called an ARM margin.
 
An adjustable rate mortgage is also known as a "variable-rate mortgage" or a "floating-rate mortgage".

Investopedia Says:
Both 2/28 and 3/27 mortgages are examples of ARMs. A 2/28 mortgage's initial interest rate is fixed for a period of two years and then resets to a floating rate for the remaining 28 years of the mortgage. A 3/27 mortgage is typically the same as a 2/28 mortgage, except that the interest rate is fixed for three years and then floats for the remaining 27 years of the mortgage.

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For a list of words related to adjustable-rate mortgage, see:

• Mortgages and Financing - adjustable-rate mortgage: variable-rate mortgage

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