How does an adjustable-rate mortgage (ARM) differ from a fixed-rate mortgage?

An adjustable-rate mortgage (ARM) is characterized by its interest rate that can change periodically, often based on a specific index or benchmark. This means that the monthly payments can fluctuate over time, reflecting changes in market interest rates. In contrast, a fixed-rate mortgage maintains the same interest rate for the entire life of the loan, resulting in stable monthly payments.

This feature of an ARM can be beneficial when interest rates are low or falling, as borrowers might initially enjoy lower payments compared to those associated with a fixed-rate mortgage. However, it also introduces the risk of increased payments if interest rates rise in the future. Understanding this key distinction is crucial for borrowers to assess their financial situation and make informed decisions regarding their mortgage options.

The other options either misrepresent the characteristics of ARMs or fixed-rate mortgages or pertain to specific conditions that do not define the fundamental difference between these two types of mortgages.