What characterizes an adjustable-rate mortgage (ARM)?

An adjustable-rate mortgage (ARM) is characterized by its interest rate, which may fluctuate periodically based on a financial index. This means that the interest rate of an ARM is not fixed for the entire duration of the loan, as it is with fixed-rate mortgages. Instead, it typically starts with a lower interest rate than fixed-rate options and adjusts at regular intervals, which can lead to lower initial payments, but also presents the possibility of increased payments over time as interest rates rise. This feature allows borrowers to potentially benefit from lower rates during the initial period, though they must also be prepared for varying payments thereafter based on market conditions.

In contrast, other types of mortgages, such as those with a fixed interest rate, provide consistency in payments throughout the entire loan term, while options that do not require a down payment or are specially designed for refinancing existing loans address different financial situations or borrower needs. Understanding these differences is crucial for borrowers as they evaluate which mortgage product supports their financial goals best.