Fluctuating interest rates
Adjustable-rate mortgages (ARMs) feature a fixed rate of interest for a set period of time—typically 3, 5 or 7 years from the origination of the loan—after which the interest rate is adjusted or reset. A 3/27 adjustable-rate mortgage, for example, has a fixed rate of interest for three years, then resets to a floating or variable rate for the remaining 27 years of the loan. Periodic rate adjustments occur throughout the remainder of the loan according to an established index. The varying interest rates paid by the borrower on the balance of the loan are based on a set benchmark plus an additional spread, called an ARM margin. Adjustable-rate mortgages are also referred to as variable-rate or floating-rate mortgages.