An adjustable rate mortgage (ARM, variable-rate mortgage or tracker mortgage) is a loan where the interest rate is periodically adjusted. The adjustment reflects the cost to the lender for borrowing on credit markets. An ARM may be offered at the lender’s standard variable rate or base rate.
The term “adjustable rate mortgage” implies that the mortgage is regulated by the Federal government, with limitations on charges known as “caps”.
Payments made by the borrower may change over time with the changing interest rate. Alternatively, the term of the loan may change.
Adjustable rates transfer part of the interest rate risk from the lender to the borrower. They can be used where unpredictable interest rates make fixed rate loans difficult to obtain. The borrower benefits if the interest rate falls but loses if the interest rate increases.