A loan in which the interest rate is adjusted periodically according to changes in a preselected index rate. The name typically describes the frequency of the rate adjustment. For example, the rate on a 1-year Adjustable-Rate Loan is adjusted once a year.
Adjustable-rate mortgages, or ARMs as they are often called, provide greater flexibility because the interest rate you start with will often be lower than with a fixed-rate mortgage. This saves you money initially and might even qualify you for a more expensive home. However, your interest rate is tied to a market index. As the index goes up or down, your payments will too, at each scheduled adjustment period.