Adjustable Rate Mortgage (ARM)

Adjustable rate mortgages are a type of mortgage loan that has interest rates automatically adjust or fluctuate with certain market indexes.

The 'adjustable-rate mortgage,' or ARM, is a type of loan that can be characterized by interest rates that rise and fall in tandem with market indexes. When the economy needs to stimulate growth, for example, these loans offer attractive options because lenders are able to make money from them even when they're not earning much on other investments like certificates of deposits (CDs).

The adjustable rate mortgage has its advantages: there's no commitment beyond one month at a fixed interest rate so you have flexibility if your financial situation changes; low upfront costs help people stay within their budget while still getting into home ownership sooner than would otherwise be possible. However an ARM also exposes borrowers who take out this kind of loan to greater risk over time.