Adjustable Rate Mortgage Definition Friday, October 12, 10:57 AM ET
An adjustable rate mortgage refers to a mortgage loan in which the interest paid on the balance of the loan varies according to a benchmark. The interest rate on adjustable rate mortgages is fixed for a given amount of time, and then it is reset periodically. The borrower's interest rate is based on a benchmark plus a spread.
Adjustable rate mortgages are available in many different initial payment periods, and are often expressed as 3/1, 5/1, or 7/1. The first number represents the initial rate period, while the second number represents the adjustment period after the initial rate period. For example, in a 7/1 ARM, the initial payment period lasts seven years, and then the payment is adjusted annually according to the benchmark, such as LIBOR.
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