Which type of adjustable-rate mortgage has an interest rate that can change yearly after an initial fixed period of three years?

The correct choice is the three-year adjustable-rate mortgage, often referred to as a 3/1 ARM. This type of mortgage features a period of fixed interest for the first three years, after which the interest rate adjusts annually based on market rates. The structure indicates that for the initial three years, the borrower benefits from a stable, predictable payment. After this period, the rate recalibrates every year, meaning it can increase or decrease depending on prevailing interest rates, which is a characteristic of adjustable-rate mortgages.

This makes the 3/1 ARM particularly suitable for borrowers who may plan to stay in their home for a limited time or anticipate a rise in interest rates, providing the opportunity to benefit from lower rates in the initial years. Understanding these nuances helps in choosing a mortgage that aligns with one's financial strategy and expectations for the future.