A mortgage in which the interest rate is periodically adjusted according to various market rates.
Lenders tend to favor ARMs because ARM rates rise and fall with market rates (the same market rates that determine what the lender is usually paying to fund the loan). In other words, ARMs are less risky for lenders. Because of this, lenders are usually more willing to offer lower introductory interest rates on ARMs.
As a borrower, you take a risk by choosing to go with an ARM. If interest rates drop, you’ve made a good financial decision. If they rise, so do your payments, meaning you would have been better off with a fixed rate mortgage (i.e., a mortgage whose interest rate doesn’t change).
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