A loan that has a fluctuating interest rate and monthly payment

ARMs start off with a fixed interest rate and monthly payment, but then adjust to reflect changes in the market interest rate. A 1-year ARM, for example, will have a fixed interest rate for 1 year and then will adjust on the second year, and continue to adjust annually over the life of the loan. You can also find ARMs that adjust semi-annually and monthly.

You get a low starting interest rate in exchange for taking a risk that rates may rise in the future. There's also a cap on how much the interest rate can go up or down. Be well-armed: before you choose this type of mortgage, figure out if you can afford the highest payment at the maximum interest rate. Other common ARMs are: 3/1, 5/1, 7/1 and 10/1.

See: Delayed ARM
Compare: Fixed rate mortgage