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Adjustable Rate Mortgage
with an interest rate
that changes periodically. Generally speaking, an adjustable rate mortgage is linked to some major benchmark rate
; for example, the interest rate may be stated as "LIBOR
+ 1%." The mortgage may or may not have a cap
on how much the interest rate can rise or fall, or on how often the interest rate may change. Very often, the initial interest rate for an adjustable-rate mortgage is lower than that for a fixed-rate mortgage
. This allows more people to qualify for an adjustable-rate mortgage; however, this kind of mortgage can be risky
because the interest rate (and therefore the monthly payment) can rise unexpectedly. Indeed the prevalence of ARMs has been blamed for the housing bubble in the mid-2000s and the subsequent recession
. See also: Credit Crunch
, Teaser Rate
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved
variable-rate mortgage (VRM)
A precursor to the modern adjustable-rate home mortgage (ARM), and still used in the area of commercial mortgages.With a variable-rate mortgage,the interest rate on the loan changes whenever the index rate changes. The monthly payments usually change every month, also. Most construction loans are variable-rate mortgages. The ARM differs because the interest rate changes at predetermined intervals, such as once a year or once every 6 months.
The Complete Real Estate Encyclopedia by Denise L. Evans, JD & O. William Evans, JD. Copyright © 2007 by The McGraw-Hill Companies, Inc.