adjustable rate mortgage (ARM) - (also called a variable rate mortgage) a mortgage in which the interest rate changes over the period of the loan. The key components of an ARM are the start rate, the index, the margin, the adjustment period, and the note rate. The initial interest rate for the loan is called the start rate. The underlying interest rate to which the loan is tied is called the index. Common indexes include the rate on 26-week T-bills, the COFI (the11th District cost of funds index), and LIBOR (the London Interbank Offered Rate). The index may change daily, weekly, monthly, quarterly, or upon the occurrence of some event, such as a Federal Reserve change in the cost of funds to member banks. The margin is a percentage added to the index rate to derive the actual note rate. The adjustment period is the time between note rate adjustments. The note rate is the actual effective interest rate on the ARM at a given point in time.

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