What is the nature of an adjustable-rate mortgage?

An adjustable-rate mortgage (ARM) is characterized by interest rates that can fluctuate at predetermined intervals after an initial fixed-rate period. This means that while the interest rate may remain stable for a set amount of time (which could range from months to years), it is then subject to adjustment based on changes in a specified index or market rate. As a result, the monthly payments can vary, leading to potential increases or decreases over the life of the loan depending on market conditions. Borrowers benefit from lower initial rates compared to fixed-rate mortgages, but they also face the risk of higher payments if interest rates rise significantly when adjustments occur.

The other options describe different mortgage characteristics that do not apply to ARMs. Specifically, fixed monthly payments without change pertain to fixed-rate mortgages. No interest accruing is a feature not associated with traditional loans, as interest is typically charged on mortgages. Lastly, penalties for early repayment can pertain to certain loans but are not a defining characteristic of an ARM.