Adjustable rate mortgages, long-term loans that provide for interest rate changes at regular intervals over their lifetimes, have recently become a major source of residential mortgage financing in this country. Today adjustable rate mortgages probably account for close to 25 percent of total home mortgage debt.
While adjustable rate mortgages (ARMs) have grown to be an important factor in mortgage lending, their variety and complexity have led to confusion. This article discusses their advantages and disadvantages to both borrowers and lenders, and highlights the nature of the risks involved. The author concludes that while lenders have enthusiastically embraced the concept of ARMs, borrowers have been reluctant in their response, forcing lenders to provide low initial interest rates and restrictions on interest-rate movements in order to sell their product.