This is the modern mortgage loan, were the borrower makes equal monthly payments which are part principal and part interest. The payments start with a larger proportion of interest at the beginning of the loan term and gradually shift to a larger proportion of principal toward the end of the payment series. With an ARM, the interest rate changes throughout the term of the loan, and the monthly payments can go up or down accordingly. The interest rate is the sum of an index rate and a margin . The margin is set by the lender and does not change.
ARMs come with lifetime interest rate caps, and usually an annual cap.
Some ARMs offer reduced initial rates. Hybrid Mortgage Hybrid mortgages start out as ARMs and are convertible to fixed rate loans, and vice versa. An additional mortgage which is in second position or subordinate to the first mortgage. These are often called home equity loans or home equity lines of credit. Jumbo Loan A non-conforming mortgage which does not meet the purchase requirements of Fannie and Freddie because it is too large.