Which mortgage allows the borrower to take advantage of changing interest rates?

An Adjustable Rate Mortgage (ARM) is designed to allow borrowers to take advantage of changing interest rates. Unlike a Fixed Rate Mortgage, which has a constant interest rate throughout the life of the loan, an ARM typically has a lower initial interest rate that is fixed for a certain period, after which it adjusts at specified intervals based on a predetermined index.

The benefit of this arrangement is that if interest rates decline, borrowers with an ARM could potentially see a reduction in their monthly payments following the adjustment period. Conversely, if rates increase, their payments might also rise, but the initial lower rate can result in savings in the early years of the mortgage. Overall, the key feature of an ARM is its ability to adapt to market interest rates, which can be advantageous if the rates drop. This characteristic distinguishes it from other types of mortgages, which would not provide the same flexibility regarding interest rate changes.