Indexed ARM

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.

BREAKING DOWN '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. Discretionary ARM

    An adjustable-rate mortgage on which the lender has the right ...
  2. Hybrid ARM

    A hybrid adjustable-rate mortgage blends the characteristics ...
  3. Mortgage Index

    The benchmark interest rate an adjustable-rate mortgage's fully ...
  4. ARM Index

    The benchmark interest rate to which an adjustable rate mortgage ...
  5. 5-6 Hybrid Adjustable-Rate Mortgage ...

    An adjustable-rate mortgage with an initial five year fixed interest ...
  6. Adjustable-Rate Mortgage - ARM

    A type of mortgage in which the interest rate paid on the outstanding ...
Related Articles
  1. Managing Wealth

    The Best Candidate For an Adjustable Rate Mortgage

    Adjustable-rate mortgages aren't for everyone, but they make sense if you are a short-term homeowner or can pay off the loan before it readjusts.
  2. Personal Finance

    Mortgages: Fixed-Rate Versus Adjustable-Rate

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

    Adjustable Rate Mortgage: What Happens When Interest Rates Go Up

    Adjustable rate mortgages can save borrowers money, but they can't go into it blind. In order to benefit from an ARM, you have to understand how it works.
  4. Personal Finance

    Adjustable-Rate Mortgage Indexes: Know Your Benchmark

    Understanding these benchmarks can help you select the most competitive adjustable-rate loan.
  5. Personal Finance

    How Interest Rates Affect the Housing Market

    Understand how rate changes can affect home prices and learn how you can keep up.
  6. Personal Finance

    ARMed And Dangerous

    In a climate of rising interest rates, having an adjustable-rate mortgage can be risky.
  7. Investing

    Subprime Is Often Subpar

    Proceed with caution when considering these short-term, high-interest mortgages.
  8. Personal Finance

    Shopping for a mortgage in 2016? Use this tool first.

    As home-buying technology has progressed, the process of finding the best mortgages rates for 2016 can all be done online.
  9. Personal Finance

    Shopping for a mortgage in 2016? Use this tool first.

    As home-buying technology has progressed, the process of finding the best mortgages rates for 2016 can all be done online.
  10. Personal Finance

    Mortgages: Fixed Rate Versus Adjustable Rate

    Choosing the right mortgage can help homebuyers avoid costly mistakes. Learn the difference between fixed- and adjustable-rate loans.
RELATED FAQS
  1. What is the difference between a 2/28 and a 3/27 ARM?

    An adjustable rate mortgage (ARM) is a type of mortgage that has a fixed interest rate for a certain time period at the beginning ... Read Answer >>
  2. What are the different types of subprime mortgages?

    Clarify your understanding of subprime mortgages. Learn about the different types, how they work and when they might be beneficial. Read Answer >>
  3. Is an adjustable rate mortgage (ARM) safe?

    Learn why an adjustable rate mortgage (ARM) can be a safe option as long as the borrower is familiar with the underlying ... Read Answer >>
  4. What is the process to take over a mortgage through a loan assumption?

    My landlord wants me to take over her mortgage.  ... Read Answer >>
  5. What are the pros and cons of a simple-interest mortgage?

    Learn the difference between a simple interest mortgage and a standard mortgage, along with their relative advantages and ... Read Answer >>
  6. If my mortgage lender goes bankrupt, do I still have to pay my mortgage?

    Yes, if your mortgage lender goes bankrupt you do still need to pay your mortgage obligation. Sorry to disappoint, but there ... Read Answer >>
Trading Center