Adjustable Rate Mortgage is a type of mortgage loan where the interest on the promissory note is adjusted based on numerous indices. The most common indices that are used for an adjustable mortgage are constant-maturity Treasury (CMT) securities, the Cost of Funds Index (COFI), and the London Inter-bank Offered Rate (LIBOR).

• Some lenders use their own indices to determine the interest rate that the applicant has to pay during the term of the mortgage. These types of mortgages should not be confused with graduated payment mortgages in which the payments may change but the interest rate remains the same.
• Adjustable rate mortgages are distinguished by their index and restrictions on charges (caps). In numerous nations, adjustable rate mortgages are the custom, and in such places, might just be referred to as mortgages. The six most common indices used for such mortgages are 11th District Cost of Funds Index (COFI), London Inter-bank Offered Rate (LIBOR), 12-month Treasury Average Index (MTA), Constant Maturity Treasury (CMT), National Average Contract Mortgage Rate, and Bank Bill Swap Rate (BBSW).
• In a number of nations, banks might publish a prime lending rate which is used as the index. The index might be useful in one of three ways: directly, on a rate plus margin basis, or based on index movement.
• A directly applied index means that the interest rate varies accurately with the index. In other words, the interest rate on the note precisely equals the index. Of the above indices, just the contract rate index is used directly. ARMs usually allow borrowers to lower their opening payments if they are ready to take on the jeopardy of interest rate changes.
• In a lot of nations, banks or comparable fiscal organizations are the most important originators of mortgages. For banks that are supported from client deposits, the customer deposits will normally have a great deal shorter terms than housing mortgages. If a bank were to present huge amounts of mortgages at permanent rates but to obtain the majority of its funding from deposits, the bank would have an asset-liability mismatch: in this case, it would be running the possibility that the interest income from its mortgage portfolio would be a lesser amount of than it desired to compensate its depositors.
• In the United States, several people argue that the savings and loan crisis was in part the basis by this difficulty, that the savings and loans companies had short-term deposits and long-term, fixed rate mortgages, and were trapped when Paul Volcker hoisted interest rates in the early 1980s. Consequently, banks and other monetary organizations proffer adjustable rate mortgages since it lessens risk and matches their sources of funding.

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