What is an adjustable-rate mortgage (ARM)?

An adjustable-rate mortgage (ARM) is defined by its feature of having an interest rate that can fluctuate over time. This adjusts periodically, usually in relation to a specified index or benchmark, which means that the borrower’s payments can vary depending on the current market conditions, interest rates, and the terms specified in the mortgage agreement.

This type of mortgage is often appealing to borrowers who might anticipate a decrease in interest rates or who prefer lower initial payments that are typical at the beginning of an ARM’s term. Typically, these loans have a fixed rate for an initial period, after which the rate can adjust at predetermined intervals, making it essential for borrowers to understand how future adjustments can impact their financial planning.

Fixed-rate mortgages provide stability without the risk of fluctuating payments; government-backed loans offer specific advantages geared toward qualifying criteria or interest rates; and loans with no down payment focus on accessibility. However, the defining characteristic of an ARM is its variable interest rate contingent on market changes, which lies at the heart of what makes it unique compared to these other mortgage types.