ARM's are loans with an interest rate that readjust periodically based on some economic index. These loans are priced based on the lender's cost of funds to make your loan, plus a predetermined margin. No matter what the economy does, the lender maintains that profit margin. As this is less risk for the lender to take, the interest rates are typically slightly lower than for fixed rates, but this is not the case at the present time (as of mid 1997). There are many varieties of ARM's, all different combinations of the following parameters:
   Index:

The index is the economic indicator that your lender has chosen as a basis for the loan, usually because the lender's funds cost them a rate based on that index.