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Adjustable Rate Mortgage

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An adjustable rate mortgage (ARM) is a type of mortgage on which the interest rate is typically changed by a lender after a predetermined initial time period. The term of the adjustable rate mortgage consists of two phases. During the early phase of the term the adjustable rate mortgage has a fixed rate of interest. After that, the interest rate of the adjustable rate mortgage is altered by the lender. Unlike a FRM (fixed rate mortgage), an adjustable rate mortgage interest stability is limited to ten years. Thus, a five year adjustable rate mortgage will offer a fixed rate for five years. Although lenders are authorized to make rate changes in the adjustable rate mortgage, they do so based on pre-selected interest rate indexes such as LIBOR. In the United States lenders have no discretion over rate changes in ARMs, since every adjustable rate mortgage is tied to an index. Most lenders offer a low introductory rate. Therefore, the interest rate of the adjustable rate mortgage is usually adjusted upward.



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