What defines a 'discounted rate' in the context of ARM?

A discounted rate in the context of an Adjustable Rate Mortgage (ARM) refers to a temporary rate that is lower than the market average for a specific period, often used as a promotional measure to attract borrowers. This discounted rate usually applies during an initial period of the loan, after which the interest rate typically adjusts based on the prevailing market rates or index it is tied to.

This strategy helps to make ARMs more appealing by offering borrowers a lower monthly payment at the beginning of the loan, which can facilitate easier entry into home ownership or refinancing. Once the promotional period ends, the loan will then revert to a standard rate that may be higher or lower, depending on the market conditions and the specific terms of the loan agreement.