Indexed ARM

AAA

DEFINITION of 'Indexed ARM'

An adjustable-rate mortgage on which the interest rate adjusts periodically according to an underlying benchmark index plus a margin. An adjustable-rate mortgage contract states which index will be used, how often the interest rate will adjust and usually sets a limit on the maximum amount the interest rate can adjust upward over the life of the mortgage. Some adjustable-rate mortgages also have limits on the amount the interest rate can adjust at each interest rate adjustment date.

INVESTOPEDIA EXPLAINS 'Indexed ARM'

The index used is variable while the margin on the mortgage is constant. There are several different indexes used for different adjustable-rate mortgages. Indexed ARMs are the only type of adjustable-rate mortgages offered in the United States.

In Europe, a type of ARM known as a discretionary ARM is popular. Discretionary ARMs allow lenders to adjust the interest rate at any time for any reason, contingent only upon giving advanced notice to the borrower. Indexed ARMs provide more protection to the borrower.

RELATED TERMS
  1. 2/28 Adjustable-Rate Mortgage - ...

    A type of adjustable-rate mortgage that has a two-year fixed ...
  2. ARM Margin

    A fixed percentage rate that is added to an index value to determine ...
  3. Adjustable-Rate Mortgage - ARM

    A type of mortgage in which the interest rate paid on the outstanding ...
  4. Total Annual Loan Cost (TALC)

    The projected total cost that a reverse mortgage holder should ...
  5. Forbearance

    A temporary postponement of mortgage payments.
  6. Mortgage Modification

    A permanent change in a homeowner's home loan terms that makes ...
RELATED FAQS
  1. Can small investors buy collateralized mortgage obligations (CMOs)?

    Collateralized mortgage obligations (CMOs), which are pools of mortgage-backed securities (MBS), are available to smaller ... Read Full Answer >>
  2. What is the difference between an option-adjusted spread and a Z-spread in reference ...

    Unlike the Z-spread calculation, the option-adjusted spread takes into account how the embedded option in a bond can change ... Read Full Answer >>
  3. What are some historical examples of debt securitization?

    The first debt securities were probably sovereign debt assets that were transferred from the British government to mercantilist ... Read Full Answer >>
  4. What price-to-book ratio is considered average in the chemicals sector?

    You can use Microsoft Excel to calculate the loan-to-value ratio if you have the mortgage amount and appraised value of a ... Read Full Answer >>
  5. How can I use the correlation coefficient to predict returns in the stock market?

    Simple interest is most commonly seen in short-term loans, such as those from payday lenders or pawn shops. You might see ... Read Full Answer >>
  6. Did the repeal of the Glass-Steagall Act contribute to the 2008 financial crisis?

    The repeal of the Glass-Steagall Act was a minor contributor to the financial crisis, if it contributed to the crisis at ... Read Full Answer >>
Related Articles
  1. Insurance

    ARMed And Dangerous

    In a climate of rising interest rates, having an adjustable-rate mortgage can be risky.
  2. Credit & Loans

    Mortgages: Fixed-Rate Versus Adjustable-Rate

    Both of these have advantages and disadvantages depending on your financial needs and prospects.
  3. Economics

    How Interest Rates Affect The Housing Market

    Understand how rate changes can affect home prices, and learn how you can keep up.
  4. Options & Futures

    Make A Risk-Based Mortgage Decision

    Find out how to choose which mortgage style is right for you.
  5. Home & Auto

    What Are The Tax Advantages Of Buying A Home?

    Don't forget these deductions and credits that homeowners can use to reduce their tax bill.
  6. Credit & Loans

    How To Finance Foreign Real Estate

    If you don't pay cash, financing real estate abroad is likely to cost more than at home. Watch for local laws and be sure your rights are protected.
  7. Credit & Loans

    Save? (Or Prepay Your Mortgage Or Student Loan?)

    With low-interest rate loans, you might be better off paying just your monthly minimum and investing whatever extra funds you have.
  8. Credit & Loans

    Not a U.S. Citizen? A Home Loan is Still Possible

    Many banks and mortgage companies offer conventional and FHA home loans to non-U.S. citizens, if they can verify their work history and financial status.
  9. Credit & Loans

    Is it Worth Saving Up for a Bigger Down Payment?

    There are numerous low-down-payment mortgage options out there, but sometimes it makes sense to build up your savings so you can borrow less.
  10. Credit & Loans

    Is A 30-Year Mortgage Really Best?

    It's the most popular choice, but home buyers with 30-year mortgages may be paying more to finance their home than they need to.

You May Also Like

Hot Definitions
  1. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
  2. Moving Average - MA

    A widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Productivity

    An economic measure of output per unit of input. Inputs include labor and capital, while output is typically measured in ...
  5. Variance

    The spread between numbers in a data set, measuring Variance is calculated by taking the differences between each number ...
  6. Terminal Value - TV

    The value of a bond at maturity, or of an asset at a specified, future valuation date, taking into account factors such as ...
Trading Center