Adjustable rate mortgage (ARM)

A mortgage loan which has a coupon or interest rate that is subject to change on predetermined reset dates, on the basis of variations in a reference rate. These loans use interest rate indices as the reference rate. Frequently the interest rate is adjusted at each interval to a rate equivalent to the index value plus a predetermined spread, or margin, over the index, usually subject to per-interval and to life-of-loan interest rate and/or payment rate caps. The cap and floor features imply that maximum rate and the minimum rate after giving effect to variations. There may also be lifetime cap and floor features. Adjustable rate mortgages may be strictly amortizing though some have negative amortization features.