Adjustable Rate Mortgage

Parent term

Adjustable Rate Mortgages (ARMs) have a fixed interest rate for a certain number of years then switch to a floating interest rate that is based on a predefined index

  • The rate is usually fixed for either one, three of 5 years, then begins to float
  • Usually helps borrowers get a lower rate/payment at the beginning
  • The risk is that if interest rates rise, a borrowers payments may go up dramatically
  • ARMs were a contributor to the 2008 Mortgage crisis
    • When rates on many mortgages reset from fixed to floating, many borrowers couldn't afford their payments