Also known as: adjustable rate mortgage · adjustable-rate mortgage · adjustable-rate mortgages · ARM · ARMs · variable rate mortgage
Written by attorneys — see sources below.
A home financing arrangement in which the interest rate adjusts periodically according to changes in a specified external index.
Amber Alonzo takes out an adjustable rate mortgage secured by her residence. The external index rises sharply after two years, causing her interest rate and monthly obligation to increase. She must reallocate household funds to meet the higher payments or risk default.
Alfred Ashford finances his property with an adjustable rate mortgage tied to a published index. When the index drops, his payments decrease for several periods. He uses the savings to accelerate principal reduction on the loan.
Alan Ackerman closes on an adjustable rate mortgage for his family home. The contract caps annual adjustments even though the index climbs steeply. His payments rise only to the contractual maximum despite larger index movement.
Ava Adebayo selects an adjustable rate mortgage for a newly purchased residence. The lender resets the rate each year to match the chosen external index plus a fixed margin. She monitors the index to anticipate future payment changes.
Andrew Avery obtains an adjustable rate mortgage allowing payments below accruing interest. During periods when the index drives the rate above his payment amount, unpaid interest is added to principal. His loan balance grows despite timely payments.
Alice Atkins holds an adjustable rate mortgage that is scheduled for a large rate reset. She refinances into a fixed-rate loan before the adjustment date. The new loan eliminates future index-driven payment changes.
An adjustable rate mortgage ties the interest rate to an external index that changes over time, while a fixed-rate mortgage maintains the same rate throughout the loan term. Borrowers face payment variability when the index moves.
Interest may accrue faster than payments cover, leading to negative amortization and an increased loan balance. The Restatement illustration confirms such a transaction remains valid under the applicable section.
Lenders offered them with low initial rates and minimal down payments to expand the pool of qualified borrowers. These features contributed to the surge in subprime originations between 2003 and 2005.
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