What best defines 'adjustable rate mortgage'?

An adjustable rate mortgage (ARM) is best defined as a loan with variable interest rates. This type of mortgage typically starts with a lower initial interest rate that adjusts periodically based on changes in a specific index, which can lead to fluctuations in monthly payments. The variability of the interest rate is a critical characteristic of ARMs, distinguishing them from fixed-rate mortgages, which maintain the same interest rate throughout the life of the loan.

The definition directly addresses the nature of ARMs, where the borrower's monthly payment and overall loan cost can increase or decrease, depending on market conditions. This attribute can result in significant savings initially but also poses the risk of higher costs if interest rates rise substantially over time.

Understanding how ARMs function is essential for borrowers considering this type of financing, as it allows them to weigh the benefits of lower initial payments against the potential for rate adjustments in the future.