Adjustable Rate Mortgage (ARM) Definition and Legal Meaning

On this page, you'll find the legal definition and meaning of Adjustable Rate Mortgage (ARM), written in plain English, along with examples of how it is used.

What is Adjustable Rate Mortgage (ARM)?

n. also called as variable rate mortage or re-negotiable rate mortgage these are the loans secured on some property whose interest rate and hence the monthly repayment installment vary over time. These are practised where the interest rates are unpredictable thereby making fixed rate loans inapprpriate. The borrower benefits if the interest rate falls and loses out if interest rates rise.

History and Meaning of Adjustable Rate Mortgage (ARM)

Adjustable Rate Mortgage (ARM) refers to loans where the interest rate and the monthly installment can vary over time. They are also known as variable rate mortgages or re-negotiable rate mortgages. ARMs came into existence in the 1970s when inflation rates were high, and people could not afford the fixed interest rates. The ARM offered a rational solution, providing an alternative route to people who were locked out of the fixed-market.

Initially, these loans were restricted to the commercial market. However, the lower initial rates, which made these loans attractive, soon made their way to the residential market. As interest rose and fell, so did the rates and payments of those with ARMs, which helped people qualify for homes they may not have been able to afford otherwise. To avoid borrower risk, banks and lenders started adapting features such as caps and indexes in the early 2000s to stabilize both interest rates and mortgages.

Examples of Adjustable Rate Mortgage (ARM)

  1. Mr. Smith took out an ARM with an initial interest rate of 3% for his new home. It was later revealed that the interest rate could fluctuate between 2% and 5%.

  2. The Joneses refinanced their home using an ARM. Their initial rate was 4.5%, but following the changes in the market condition, the rate rose to 5.5%.

  3. The Millers opted for an ARM when buying their first home. They wanted to benefit from the low-interest rates due to the unpredictable market, but they knew it also means that the rate could increase over time.

Legal Terms Similar to Adjustable Rate Mortgage (ARM)

  1. Mortgage
  2. Interest rate
  3. Fixed Rate Mortgage
  4. Loan Agreement
  5. Refinance