An Adjustable Rate Mortgage or ARM is a mortgage loan that does not have a fixed interest rate. During the life of the loan, the interest rate will change based on the index rate. Also referred to as adjustable mortgage loans (AMLs) or variable-rate mortgages (VRMs).
ARMs are subject to changes in interest rates; when rates change, monthly payments increase or decrease at intervals determined by the lender and a prescribed index and set margin; the monthly payment increases usually have a per-adjustment and a lifetime cap.
The initial interest rate is usually below that of conventional fixed-rate loans. The interest rate may change over the life of the loan as market conditions change. There is typically a maximum (or ceiling) and a minimum (or floor) defined in the loan agreement. If interest rates rise, so does the loan payment. If interest rates fall, the loan payment may as well.