What characterizes an adjustable-rate mortgage (ARM)?

An adjustable-rate mortgage (ARM) is characterized by having interest rates that fluctuate based on market conditions. This means that rather than being fixed for the entire loan term, the interest rate can change at predetermined intervals, leading to varying monthly payments. These adjustments are typically tied to an index that reflects the cost of borrowing money in the economy, making ARMs potentially riskier than fixed-rate mortgages if interest rates rise significantly over time.

The nature of an ARM allows borrowers to potentially benefit from lower initial rates compared to fixed-rate mortgages, especially in a declining interest rate environment. As market rates change, so too do the payments, making it a flexible but sometimes unpredictable option for financing a home. This option appeals to certain buyers who may expect to refinance or sell before any potential rate increases occur.