An Adjustable Rate Mortgage (ARM) is a mortgage loan that is most widely known for its low starting interest rate (when compared to the 30 & 15 year mortgage loans). This 'low' introductory rate is used to calculate the mortgage payment for a specified period of time.

Once this introductory period is over, the interest rate is adjusted periodically based on a preselected index. The most commonly used index is the yield on the one-year Treasury Bill or the LIBOR.  The new interest rate is determined by adding this index to a set margin (which is determined by the lender).

Although there are a variety of adjustable rate mortgage programs available, the most common program is the One Year Adjustable Mortgage (one Year ARM). The interest rate on the one year ARM is adjusted once each year, for 30 years. Three (3), 5, and 7 Year Adjustable Rate Loan Programs are also widely seen.  Newer ARM programs and Interest Only and Option ARM's.

APR's on variable rate loans are subject to increase but may also decrease from year-to-year.  The borrower should be prepared to handle an increase in his/her monthly payment (should the index rate increase).

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