What characterizes an adjustable-rate mortgage?

An adjustable-rate mortgage (ARM) is specifically characterized by a varying interest rate and payment that adjusts based on predefined periods. This means that instead of a fixed interest rate for the entirety of the loan, the interest rate on an ARM fluctuates after an initial fixed period, often influenced by an index or benchmark interest rate. As the market conditions change, the borrower’s monthly payments can increase or decrease, making it possible for the rate to be updated annually, biannually, or in accordance with another schedule. This type of mortgage can offer lower initial rates compared to fixed-rate mortgages, but it carries the risk of future increases in rates, which can lead to higher monthly payments over time. Understanding this characteristic is essential for borrowers considering their options in mortgage products.