What type of mortgage has a changing interest rate?

An Adjustable Rate Mortgage (ARM) is characterized by its changing interest rate, which is typically tied to a specific index. The interest rates for ARMs fluctuate over time, meaning they can increase or decrease based on market conditions or other economic factors. This type of mortgage often starts with an initial fixed period during which the rate remains stable, but after that, it adjusts periodically according to the terms of the loan agreement.

This feature makes ARMs attractive to borrowers who may benefit from lower initial rates, but it also carries the risk of rising payments in the future. Understanding the mechanics of ARMs is crucial for borrowers, as they must be prepared for possible increases in their monthly mortgage payment over time, depending on market trends. This dynamic nature of ARMs contrasts with fixed-rate mortgages, where the interest rate remains constant throughout the loan term, providing predictable payments.