adjustable-rate mortgage

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.

A 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. The designs are licensed to more than a dozen semiconductor manufacturers that make chips for smartphones, PDAs, games and numerous other consumer products. For example, ARM processors power Apple's iPod and iPhone.

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

StrongARM Chips

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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A mortgage that allows adjustments of the loan interest rate at pre-specified regular intervals.

Also known as a "variable-rate mortgage" or a "floating-rate mortgage".

Investopedia Says:
The interest rate for the mortgage is adjusted according to an index (usually a bundle of government securities) plus a predetermined margin.

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Mortgage agreement between a financial institution and a real estate buyer stipulating predetermined adjustments of the interest rate at specified intervals. Mortgage payments are tied to some index outside the control of the bank or savings and loan institution, such as the interest rates on U.S. Treasury bills or the average national mortgage rate. Adjustments are made regularly, usually at intervals of one, three, or five years. In return for taking some of the risk of a rise in interest rates, borrowers get lower rates at the beginning of the ARM than they would if they took out a fixed rate mortgage covering the same term. A homeowner who is worried about sharply rising interest rates should probably choose a fixed rate mortgage, whereas one who thinks rates will rise modestly, stay stable, or fall should choose an adjustable rate mortgage. Critics of ARMs charge that these mortgages entice young homeowners to undertake potentially onerous commitments.

Also called a Variable Rate Mortgage (VRM), the ARM should not be confused with the Graduated Payment Mortgage which is issued at a fixed rate with monthly payments designed to increase as the borrower's income grows. See also Cap; Cost of Funds; Growing Equity Mortgage; Mortgage Interest Deduction; Self-Amortizing Mortgage; Shared Appreciation Mortgage; Teaser Rate.

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 that allows the interest rate to be changed at specific intervals over the maturity of the loan.
Example: A person obtains an adjustable-rate mortgage to finance the purchase of a home. After a 2-year period, the lender may adjust the rate of interest on the loan in accordance with an established index.