What is an ARM?
An ARM (adjustable rate mortgage) is a variable rate mortgage, in which the interest rate adjusts based on the terms of the mortgage. For example, with a one-year ARM, the interest rate adjusts annually. With a 3-1 ARM, the interest rate is fixed for a period of three years then adjusts annually thereafter.
An ARM is an acronym for “adjustable rate mortgage.” That refers to a home loan where the interest rate charged on the amount of money you’re borrowing to purchase the home adjusts, or changes, over time as the government raises or lowers the rate of interest that banks charge each other for overnight loans (federal funds rate). The interest rate that banks charge customers on the money they borrow is tied to the federal funds rate. As the federal funds rate rises, typically so does the interest rate charged on mortgage loans. Likewise as the federal funds rate falls so does the interest rate charged on mortgage loans.
