Legal Definitions - ARM

ARM stands for Adjustable-Rate Mortgage.

An Adjustable-Rate Mortgage (ARM) is a type of home loan where the interest rate is initially fixed for a specific period. After this initial period, the interest rate can change periodically throughout the remainder of the loan term. These changes are tied to an underlying financial index or benchmark, meaning the monthly payment can go up or down depending on market conditions.

Here are some examples illustrating how an Adjustable-Rate Mortgage works:

• Example 1: A young couple purchases their first home using a 5/1 ARM. This means their interest rate is fixed for the first five years of the loan. After that initial period, the interest rate will adjust annually based on a predetermined market index, potentially causing their monthly mortgage payments to increase or decrease.
• Example 2: An experienced real estate investor plans to buy a property, renovate it, and sell it within three years. To minimize initial borrowing costs, they choose a 7/1 ARM. They benefit from a lower fixed interest rate for the first seven years, confident they will sell the property before the rate ever adjusts, thus avoiding any potential payment increases.
• Example 3: A professional anticipates a significant promotion and salary increase in two years. To take advantage of a lower initial interest rate, they refinance their existing fixed-rate mortgage into a 3/1 ARM. They are comfortable with the risk of future rate adjustments, believing their increased income will easily cover any potential rise in monthly payments after the initial three-year fixed period.