J Theisen Realty

Posted onNovember 30, 2011 - 1:52 pm by Admin | 0 Comments

The adjustable rate mortgage (ARM) is a mortgage with periodic changes in interest rate over the life of the note based on various money indices, such as London Interbank Offered Rate (LIBOR) or the 12-month Treasury Average Index.

Banks Reallocation of Mortgage Risks to Borrowers

Mortgage lenders developed the ARM product to pass onto the borrower the risks of volatile market interest rates during the life of a mortgage note. By bearing this risk, the ARM borrower also assumes the potential for financial rewards if the market plays in his favor.

The mortgage lender in fixed-rate mortgages, however, is locked in at the initial interest rate on the loan. Accordingly, the lender is made to suffer the lost in profits if inflation rises or the market forces interest rates upward. A fixed-rate vs. adjustable rate interplay would suggest that a drop in the fixed mortgage interest rate (reduction in the cost of borrowing) would result in an increase in adjustable rate mortgages by lenders.


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