Adjustable rate mortgages (ARM) are mortgages whose initial rate will change after a specified period of time. A two year adjustable mortgage with a 6% interest rate will remain 6 percent for two years, and subsequently, that is, after two years, the rate will change relative to the index to which it is tied. In most cases the rates adjust to a higher rate, thereby increasing the monthly mortgage note of the mortgage holder. It is advisable to refinance before an adjustable mortgage matures.
In the United States, ARMs are generally tied to any one of the following:
- 12-month Treasury Average Index (MTA)
- 11th District Cost of Funds Index (COFI)
- Bank Bill Swap Rate (BBSW)
- London Interbank Offered Rate (LIBOR)
- Constant Maturity Treasury (CMT)
- National Average Contract Mortgage Rate
In many other countries, the ARM is tied to the Prime Lending Rate, charged by the major banks.