Adjustable-Rate Mortgage (ARM)

Although they are often used interchangeably, there is actually one key difference between an adjustable-rate mortgage and a variable-rate mortgage. 

The interest rate on an ARM will fluctuate over time because the interest is pegged to a benchmark short-term interest rate, typically the prime rate. As the prime rate changes, the ARM rate will also change. What does that mean for you, the Borrower? It means if interest rates increase, not only will the cost of your debt increase but so will your monthly mortgage payment.

There are some ARM products that offer fixed-payments. This means your payment stays the same for the term even when interest rates change. In this case, your payment would stay the same but the amortization period could change.