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adjustable rate mortgage

noun

Definition of adjustable rate mortgage

: a mortgage having an interest rate which is usually initially lower than that of a mortgage with a fixed rate but is adjusted periodically according to the cost of funds to the lender

Examples of adjustable rate mortgage in a Sentence

Recent Examples on the Web

 Some desire a better product, such as getting out of an adjustable rate mortgage into a fixed loan. — Washington Post, "Interest rates are down, so is it time to refinance?," 17 June 2019 Many people who faced foreclosure during the last recession were first-time buyers who used an adjustable rate mortgage (ARM) to finance their purchase. — Ellen James Martin, courant.com, "Smart Moves: Tips for young, single homebuyers," 19 June 2019 The market's behavior suggests that investors expect two more rate hikes from the nation’s central bank this year — actions that will affect credit cards, home equity lines of credit and adjustable rate mortgages. — Adam Shell, USA TODAY, "Mortgages, other loans get pricier as 10-year Treasury rate tops 3%," 24 Apr. 2018 The rate on five-year adjustable rate mortgages rose to 3.57 percent this week from 3.53 percent last week. — Paul Wiseman, USA TODAY, "Long-term U.S. mortgage rates climb for fifth straight week," 8 Feb. 2018 The Fed rate affects the cost of borrowing for everything from savings to credit cards to adjustable rate mortgages. — Lucy Bayly, NBC News, "Federal Reserve hikes interest rates for third time this year," 13 Dec. 2017 Demand for adjustable rate mortgages is also rising. — Diana Olick, USA TODAY, "Weekly mortgage applications stall along with rates and home sales," 4 Oct. 2017

These example sentences are selected automatically from various online news sources to reflect current usage of the word 'adjustable rate mortgage.' Views expressed in the examples do not represent the opinion of Merriam-Webster or its editors. Send us feedback.

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First Known Use of adjustable rate mortgage

1979, in the meaning defined above

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More Definitions for adjustable rate mortgage

adjustable rate mortgage

noun

Financial Definition of adjustable rate mortgage

What It Is

An adjustable-rate mortgage (ARM) is a type of mortgage using a varying interest rate calculated by adding a premium to a specific benchmark rate. These loans are also called variable-rate mortgages or floating-rate mortgages.

How It Works

The idea behind ARMs is very simple, but there are many covenants that can be included in the contracts to complicate things. Two common types of ARMs are the interest-only ARM and the hybrid ARM. Interest-only ARMs offer a set period during which the borrower only pays the interest on the loan. This reduces the borrower's payment, but it leaves the principal outstanding. Hybrid ARMs offer a fixed interest rate for a period of time and then revert to a variable rate for the remainder of the loan's life. A 3/1 ARM, for example, is a mortgage that carries a fixed rate for the first three years and then adjusts every year thereafter.

In many cases, ARMs have caps -- limits on how high and sometimes how low the interest rate can go, and how much they can move in any one year, month, or quarter. In some cases, the interest rate will only adjust up -- that is, borrowers will get no benefit if interest rates fall.

To understand how adjustable interest rates affect a borrower's payment, let's assume that a bank offers a $100,000 ARM to a potential borrower. The interest rate is the prime rate plus 5% with a maximum of 10%. If the prime rate is 3%, then the borrower's interest rate is 8% (5% + 3%), and the monthly payment would be $733.77. But if the prime rate increases to, say, 4%, then the loan's interest rate resets to 9% (5% + 4%), and the payment is now $804.63.

[InvestingAnswers Feature: Mortgage Calculator: What Will My Monthly Principal & Interest Payment Be?]

Why It Matters

As you can see, ARMs can have complex implications. Thus, as is the case with any loan, borrowers must be sure to read and understand the lender's documentation and contemplate the implications of changes in margins. Borrowers should be sure they can handle the worst-case scenario of being forced to make the highest mortgage payments allowed. Lenders are legally required to disclose how high the borrower's monthly payment might go.

Source: Investing Answers

adjustable rate mortgage

Legal Definition of adjustable rate mortgage

see mortgage

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