__Adjustable Rate Mortgage__

An ** adjustable rate commercial mortgage** is the same as a

*residential*adjustable rate mortgage (ARM). This type of loan is where the interest rate adjusts periodically up or down through a set index. This can also be referred to as a floating rate mortgage. The rate is fixed for a period at the beginning, called the “initial rate period”, but after that it may change based on movements in an interest rate index. ARMs are contrasted with fixed-rate mortgages (FRMs) on which the quoted rate holds for the entire life of the mortgage.

The **adjustment interval** is the period of time between changes in the interest rate for an adjustable-rate mortgage. Typical adjustment intervals are one year, three, and five years.

The indices used are typically the one-year Constant-Maturity Treasury (CMT), the Cost of Funds Index (COFI), or the London Interbank Offered Rate (LIBOR). The interest rate on the floating rate loan is determined by adding a few percentage points, called a margin to the index rate. For example, suppose that the one-month LIBOR rate is currently at 3.00%. The lender determines that ARMs for a certain risk set should be given a margin of 50 basis points (or 0.50%) above the index. The ARM interest rate for that period would then be 3.50%.

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