Adjustable-rate mortgages (ARMs)1 differ from fixed-rate mortgages in that the interest rate and monthly payment move up and down as market rates fluctuate. Most ARMs have an initial fixed-rate period during which the borrower’s rate doesn’t change. Adjustable-rate mortgages tend to be less expensive if you plan to move within seven years. After the fixed-rate, an ARM’s rate fluctuates at the same rate as an index spelled out in closing documents. The lender finds out what the index value is, adds a margin to that figure and recalculates the borrower’s new rate and payment. The process repeats each time an adjustment date rolls around.
London interbank offered rate (libor)
The rate most international banks are charging each other on large loans.