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An adjustable rate mortgage (ARM) is a loan that has a variable interest rate. Hybrid ARM loans carry a fixed interest rate for a predetermined period and will convert to an index (usually treasury bill) plus margin (a predetermined rate) once the fixed period is over. The margin will vary based on a number of factors such as credit score, LTV, property type and etc. As far as the index is concerned, the lender has total control over the decision of selecting the index.
The more common adjustable rate mortgage loans are 3/1 (rate is fixed for the first 3 years), 5/1 (rate is fixed for the first 5 years), 7/1 (rate is fixed for the first 7 years) and 10/1 (rate is fixed for the first 10 years) usually amortized over a 30 year period. An adjustable loan may be an interest only loan. Which basically means you only have to pay interest on the balance of the loan for the fixed period vs. principle and interest on a traditional loan.
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