Adjustable-Rate Mortgag (ARM): A mortgage whose interest rate and monthly payments vary throughout its life.  ARMs typically start with an artifically low interest rate that gradually rises over time. The interest rate is determined by a forumal: margin (which is a fixed number) plus index (which varies). Generally speaking, if the overall level of interest rates drops, as measured by a variety of different indexes, the interest rate of your ARM generally follows suit.  Similarly, if interest rates rise, so does your mortgage's interest rate and montly payments.  Caps limit the amount that the interest rate can flucuate. Before you agree to an ARM, be certain that you can afford it's highest possible payments.