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What is an adjustable rate mortgage (ARM)? Kiritsis Law Group 212 922 0005

May 13, 2021

By: John Kiritsis, Esq., CPA, MBA, MS, JD, LL.M

Generally, it refers to a type of a mortgage loan where the interest is subject to changes during the term of the loan. With this type of mortgage, the borrower benefits, if the interest rates fall while he will lose if the interest rates rise. Depending on local real estate customs, and jurisdiction, an adjustable rate mortgage may often be referred to as variable rate mortgage and/or tracker mortgage. Generally, the underlying index rate, will be carefully drafted in the loan agreement, to have a precise legal definition (generally, institutional lenders are pretty good at drafting loan documents, since many of them do this on a daily basis). If the underlying index rate, is not legally defined in the loan agreement whether intentionally or due to poor drafting; then depending on the jurisdiction, the courts would construe that it can be changed solely by the lender’s discretions subject to statutory restrictions (i.e. usury laws). In this author’s experience, the base rate is assigned a value on some type of a federal loan obligation rate, and there is often a cap rate.

 

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