What type of mortgage has an interest rate that can change over time?

An adjustable-rate mortgage (ARM) features an interest rate that can change at specified times over the life of the loan. This means that the rate is typically initially set for a period (e.g., 5, 7, or 10 years) after which it adjusts periodically, often in relation to a specific index or benchmark. This adjustment can lead to lower initial monthly payments compared to fixed-rate mortgages, which have a constant interest rate for the life of the loan, making ARMs potentially more affordable in the short term.

Understanding this key feature is vital, especially as rates can increase after the initial period, affecting the borrower's long-term payment obligations. The nature of an ARM allows borrowers to benefit from potentially lower rates when market conditions are favorable but also carries the risk of increasing payments in the future, making it important for borrowers to fully understand the terms before committing to this type of mortgage.