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  Adjustable Rate Mortgage (ARM) Definition
Adjustable Rate Mortgage (ARM) A mortgage loan with an interest rate that moves higher or lower periodically depending on the terms of your loan. If you take out an adjustable rate mortgage, also known as an ARM, you will have a lower initial interest rate than a fixed rate mortgage, but that interest rate could increase. For example, when taking out a 5-year ARM, your initial interest rate will be fixed for a five-year period and then can adjust each year after that. Whether or not your interest rate will increase or decrease is determined by the index that your lender uses to base their interest rates on. Most ARMs have what is called a cap, which will protect you in the event that interest rates increase substantially beyond a pre-determined rate level.

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