Which term describes a type of mortgage where the interest rate may change?

An adjustable-rate mortgage is characterized by its variable interest rate, which means that the interest rate can change at specified intervals over the life of the loan. Typically, these changes are tied to fluctuations in a specific index that reflects changes in the broader interest rate environment. This type of mortgage often starts with a lower interest rate compared to fixed-rate mortgages and can potentially lead to lower initial monthly payments.

As the interest rate adjusts, monthly payments may increase or decrease based on the current market rates, making it a distinct choice for borrowers who may benefit from lower initial payments but must be cautious of potential increases in their payment obligations over time. Understanding this feature is essential for borrowers to assess their risk tolerance regarding changes in their payment amounts as market conditions evolve.