(1.) Mortgage Loans with interest rates that change. Adjustable Rate Mortgages (ARMs) may start with lower monthly payments than fixed-rate mortgages, but keep the following in mind:

-Your monthly payments could change. They could go up, sometimes by a lot, even if interest rates don't go up.

-Your payments may not go down much, or at all, even if interest rates go down.

 -You could end up owing more money than you borrowed, even if you make all your payments on time.

-If you want to pay off your ARM early to avoid higher payments, you might have to pay a penalty.

(2.) A mortgage on which the interest rate, after an initial period, can be changed by the lender. While ARMs in many countries abroad allow rate changes at the lender's discretion ("discretionary ARMs"), in the U.S. most ARMs base rate changes on a pre-selected interest rate index over which the lender has no control. These are "indexed ARMs". There is no discretion associated with rate changes on indexed ARMs.

(Also Known As "Renegotiable Rate Mortgage")

Calculating an ARM

calculating an ARM is very simple -  find out what the margin on your mortgage is and add it to the rate on the index its attached to. 

Index + Margin = ARM Rate

Most common ARM indexes

LIBOR - London Interbank Offered Rate

MTA - Monthly Treasury Average

CODI - Certificate of Deposit Index

Bankapedia's Take

Oh how times have changed. The ARM once the darling of the mortgage industry, hows now been named as a major accomplice in its demise. Now, while still available, generally frowned upon. The irony being that the Indexes that are used to calculate ARMS are all down, so ARM rates are far lower in a down economy than they are in a up economy.