Adjustable-Rate Mortgage (ARM)

An adjustable-rate mortgage differs from a fixed-rate mortgage. With a fixed-rate mortgage, the interest rate stays the same during the life of the loan. With an ARM, the interest rate changes periodically, usually in relation to an index, and payments may go up or down accordingly. Lenders generally charge lower initial interest rates for ARMs than for fixed-rate mortgages. There is risk to the borrowers that an increase in interest rates will lead to higher monthly payments.