What is a characteristic of an adjustable-rate mortgage (ARM)?

An adjustable-rate mortgage (ARM) is characterized by an interest rate that adjusts periodically based on a benchmark interest rate or index. This means that after an initial period where the interest rate is fixed, the rate can fluctuate at specified intervals, leading to potential changes in the monthly payment amounts. The interest rate adjustment is usually tied to an underlying financial index, and the specifics of how and when it adjusts are typically outlined in the loan agreement.

The nature of an ARM allows borrowers to benefit from lower initial rates compared to fixed-rate mortgages. However, this can also introduce uncertainty, as payments may increase or decrease over time depending on market conditions. This flexible structure can appeal to borrowers who anticipate income growth or plan to refinance or sell before the adjustments occur. Understanding this characteristic is crucial for borrowers evaluating their financing options.