Definition: The interest rate on an adjustable rate mortgage can vary, usually with the rate on the 1-year Treasury bill. The lender can let the rate adjust monthly, quarterly, annually, every 3 years or every 5 years, depending on the type of loan you get.
The advantage of an adjustable rate mortgage is that the rate and monthly payments are usually lower than a fixed rate mortgage. The disadvantage is that the rate can go up if the Treasury bill rate increases, thus suddenly increasing your monthly payment.
Adjustable rate mortgages became more popular in 2004, when the Federal Reserve began raising the Fed Funds rate. This made adustable-rate mortgages more profitable compared to fixed rate mortgages, whose rates are tied to the 10-year Treasury Bond.
Also Known As: ARM, adjustable rate loan, variable rate mortgage, variable rate loan
Examples:
There are many types of adjustable rate mortgages, so be sure you understand what you are getting.
