Adjustable Rate Mortgage (ARM)
A mortgage ( www.practicallaw.com/0-382-3636) loan in which the interest rate on the note ( www.practicallaw.com/3-382-3654) periodically fluctuates based on listed indexes. Certain indexes are more commonly used, including the London Interbank Offered Rate ( www.practicallaw.com/0-382-3580) (LIBOR) and the Cost of Funds Index (COFI). However, some lenders tie ARMs to their own cost of funds indexes instead. ARMs often contain limitations (caps) on what a borrower can be charged as interest rates rise.