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An ARM is a mortgage with an
interest rate that may vary over the term of the loan --
usually in response to changes in the prime rate or Treasury
Bill rate. The purpose of the interest rate adjustment is
primarily to bring the interest rate on the mortgage in line
with market rates.
Mortgage holders are protected
by a ceiling, or maximum interest rate, which can be reset
annually. ARMs typically begin with more attractive rates
than fixed rate mortgages -- compensating the borrower for
the risk of future interest rate fluctuations. |
