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Adjustable-Rate Mortgage (ARM)

A fluctuating interest rate of a mortgage (or deed of trust) loan that changes along with another rate. The mortgage rate is usually connected to a commonly followed rate such as the prime rate or LIBOR, plus a certain margin, such as 1 or 2%.


Example:  A young woman obtains an adjustable-rate mortgage to finance the purchase of a new home for her family. The lender may adjust the interest rate on the loan in accordance with an established index, on yearly intervals.