Final answer:
ARM stands for adjustable-rate mortgage, a loan for purchasing a home with an interest rate that can change over time. ARMs often start with lower interest rates but include inflation adjustments which can raise rates in line with increasing inflation.
Step-by-step explanation:
The term ARM stands for adjustable-rate mortgage. It is a type of loan used to purchase a home, where the interest rate varies with market interest rates.
Unlike a fixed-rate mortgage where the interest rate remains the same throughout the life of the loan, an ARM can change, often in relation to an index, and payments can go up or down accordingly. This type of loan can be appealing as it often offers a lower initial interest rate compared to fixed-rate mortgages.
This lower rate can make the ARM more affordable in the short term. ARM loans often include inflation adjustments. Meaning, if the inflation rate rises, the interest rate on the loan may increase to match the change in inflation.
This protects lenders against the risk that inflation will diminish the value of the payments over time. For borrowers, it means the potential for fluctuating monthly payments based on the current interest rate environment.