What distinguishes an adjustable-rate mortgage?

An adjustable-rate mortgage (ARM) is characterized by an interest rate that can fluctuate throughout the life of the loan, typically based on a specific financial index. This means that the interest rate may increase or decrease over time, depending on changes in the market conditions as reflected by the index, which is usually tied to Treasury bonds or other economic indicators.

This feature differentiates ARMs from fixed-rate mortgages, where the interest rate remains constant for the entirety of the loan term, providing predictable monthly payments. The potential for changes in interest rates can lead to lower initial payments compared to fixed-rate loans, but it also introduces uncertainty regarding future payments, as they can rise if the index increases.

The other options describe features that do not apply to adjustable-rate mortgages. Fixed interest rates, interest-free mortgages, and loans backed by government securities are different types of mortgage arrangements and do not accurately characterize the nature of ARMs.