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TeachMeFinance.com Adjustable Rate Mortgage (ARM) -- Also called a Variable Rate Mortgage (VRM), it is a mortgage contract between a financial body and a real estate buyer specifying periodic changes, every one, three or five years, in the interest rate as determined in advance. Payments on mortgage are linked to a factor that is not within the influence of the loan institution, e.g. the average mortgage rate in the U.S. As a reward for bearing the risk of an increase in the interest rate , borrowers pay lower interest at the start of the ARM than under a fixed rate mortgage for the same duration. Generally, an agent who wants to buy a home but is concerned about spiraling interest rates should go for a fixed rate mortgage, while a homeowner with an expectation of more or less steady or even falling interest rates should opt for an ARM. A criticism of ARM is that it is an inducement to the younger generation to take on very heavy obligations. ARM is to be differentiated from Graduated Payment Mortgage, which is issued at a set rate, with monthly mortgage payments going up as the borrower's income increases. See also Cap, Cost of Funds, Growing Equity Mortgage, Mortgage Interest Deduction, Self-Amortizing Mortgage, Teaser Rate. another definition... Adjustable Rate Mortgage (ARM) -- Adjustable Rate Mortgage; a mortgage loan subject to changes in interest rates; when rates change, ARM monthly payments increase or decrease at intervals determined by the lender; the Change in monthly -payment amount, however, is usually subject to a Cap. another definition... adjustable rate mortgage (ARM) -- a loan in which the interest rate is periodically adjusted, moving higher or lower in the same ratio as a preselected index, such as Treasury bill rates. ARM loans may include caps on interest rate increases in a given time period, and over the life of the loan, and may include limits on the frequency of interest rate adjustments. ARM loans generally have initial below market interest rates in return for the borrower sharing the risk that interest rates may rise during the life of the loan. About the author Mark McCracken Author: Mark McCracken is a corporate trainer and author living in Higashi Osaka, Japan. He is the author of thousands of online articles as well as the Business English textbook, "25 Business Skills in English". Copyright © 2005 by Mark McCracken, All Rights Reserved. TeachMeFinance.com is an informational website, and should not be used as a substitute for professional financial or legal advice. TeachMeFinance.com and its owner recommend consultation with a professional financial advisor prior to any investment or financial decision. Please read our disclaimer.