An adjustable rate mortgage (ARM) is a home loan with an interest rate that adjusts over time to reflect market conditions. Usually, the initial interest rate is fixed for a period. Then, the interest rate resets based on a benchmark or index plus an additional spread.
ARMs come with rate caps that limit how high the rate can be or how much the payments can vary. Periodic rate caps limit how much the interest rate can change from one year to the next and it can also limit the monthly payment amount, so the consumer is not put in an extremely tight cash flow situation.
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