Financial Dictionary
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Adjustable Rate Mortgage -
ARM. A mortgage with an interest rate that may change,
usually in response to changes in the Treasury Bill
rate or the prime rate. The purpose of the interest
rate adjustment is primarily to bring the interest rate
on the mortgage in line with market rates. The mortgage
holder is protected by a maximum interest rate (called
a ceiling), which might be reset annually. ARMs usually
start with better rates than fixed rate mortgages, in
order to compensate the borrower for the additional
risk that future interest rate fluctuations will create.
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