Flexible Payment ARM

See: Adjustable Rate Mortgage.

ARM stands for “adjustable rate mortgage.” Instead of having the same mortgage rate for the life of the loan (say, 5% every year of your 30-year mortgage), ARM loans have a rate that fluctuates based on prevailing interest rates. So if the prime rate goes up, so does your mortgage payment.

The flexible payment plan allowed consumers to pick from four different payment sizes each month. The lowest amount didn’t cover the interest amount, meaning the loan effectively got bigger if the homeowner chose that amount consistently. The highest possible payment treated the loan as a 15-year mortgage, allowing the homeowner to pay off the loan faster.

While the structure theoretically gave borrowers a lot of flexibility, in practice the contracts included a lot of fine print. Regulators turned sour on the product. They felt consumers were being hurt by teaser rates, limitations on how often the lower payments could be used and the fact that the loan's lowest payment tier caused the loan to actually grew in size each month.

Meanwhile, the loan structure reached its peak popularity headed into the financial crisis of 2007-2008. By the time the dust settled in the housing market after that economic whirlwind, a lot of people with flexible payment ARMs found out that they owed more on the mortgage than the house was worth.

Eventually, the Consumer Financial Protection Bureau (CFPB) issued new qualified mortgage standards. These rules effectively killed the Flexible Payment ARM market.