Adjustable Rate Mortgage (ARM)

Business / Taxes / Adjustable Rate Mortgage (ARM): An adjustable rate mortgage is a long-term loan you use to finance a real estate purchase, typically a home. Unlike a fixed-rate mortgage, where the interest rate remains the same for the term of the loan, the interest rate on an ARM is adjusted, or changed, during its term. The initial rate on an ARM is usually lower than the rate on a fixed-rate mortgage for the same term, which means it may be easier to qualify for an ARM. You take the risk, however, that interest rates may rise, increasing the cost of your mortgage. Of course, it's also possible that the rates may drop, decreasing your payments. The rate adjustments, which are based on changes in one of the publicly reported indexes that reflect market rates, occur at preset times, usually once a year but sometimes less often. Typically, rate changes on ARMs are capped both annually and over the term of the loan, which helps protect you in the case of a rapid or sustained increase in market rates. However, certain ARMs allow negative amortization, which means additional interest could accumulate on the outstanding balance if market rates rose higher than the cap. That interest would be due when the loan matured or if you want to prepay.

Other Words for Rate

Rate Noun Synonyms: rank, grade, class, classify, evaluate, estimate, calculate, compute, count, reckon, judge, gauge, assess, appraise, measure
Rate Verb Synonyms: measure, pace, gait, speed, velocity, clip
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Teaser Rate

Business / Finance / Teaser Rate: A page from an S&P stock that provides information on thousands of stocks, often sent to prospective purchasers. MORE

Pass-Through Rate

Business / Finance / Pass-Through Rate: The net interest rate passed through to investors after deducting servicing, management, and guarantee fees from the gross mortgage coupon. MORE

Passive Portfolio Strategy

Business / Finance / Passive Portfolio Strategy: A strategy that involves minimal expectational input, and instead relies on diversification to match the performance of some market index. A passive strategy assumes that the marketplace will reflect MORE

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