Amortizing ARM
Amortizing adjustable-rate mortgages (ARM) are the most common type of ARM. Like all ARM's, a fully amortizing ARM has an interest rate that changes periodically based on a selected rate index such as the US Treasury Bill or London Inter-Bank Offer Rate (LIBOR).
Fully amortizing ARM's usually begin with a fixed interest rate period. This fixed interest rate will typically be less than the rate offered for fixed rate loans of the same term. Monthly payments generally include principal, interest, taxes and insurance. Payments are calculated to payoff the entire mortgage balance at the end of the term. The most popular term is 30 years.
At the end of the fixed interest rate period, an adjustment to the interest rate is made based on market conditions. The adjustment may be up or down and will adjust at a fixed interval through the remainder of the loan term.