Finance & Mortgages

Adjustable-Rate Mortgage (ARM)

A mortgage whose interest rate changes over time based on an index plus a fixed margin, subject to rate caps.

An adjustable-rate mortgage, or ARM, has an interest rate that changes at set intervals. The rate equals an index, which moves with the market, plus a margin, which is the lender's fixed markup. Rate caps limit how much the rate can rise each adjustment period and over the life of the loan.

An ARM often starts with a lower introductory rate than a fixed-rate loan, then adjusts on a schedule.

On the exam

Rate equals index plus margin. The index is the market piece; the margin is the lender's fixed add-on.

Exam trap

The borrower controls neither the index nor the margin. Caps limit increases, but the rate can still rise.

Tested in

Financing & Settlement (6% of the exam)

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Related terms

Sources

Truth in Lending Act, CFPB ARM overview

This definition is Texas real estate exam-prep education, not legal, tax, or professional advice. Verify current rules against the official source before relying on them for a real transaction. Back to the full glossary.