Which of the following best defines an adjustable-rate mortgage (ARM)?

An adjustable-rate mortgage (ARM) is defined by its feature of having changing interest rates over the life of the loan. This means that unlike a fixed-rate mortgage, where the interest rate remains constant throughout the duration of the loan, an ARM typically starts with a lower initial interest rate which can fluctuate periodically based on market conditions or an index rate. These adjustments can lead to both increases and decreases in monthly payments, depending on how the interest rates change.

Understanding this concept is crucial, especially in the context of real estate transactions, as it impacts affordability and can influence a borrower's long-term financial planning. Borrowers should be aware of the risks associated with ARMs, including potential payment increases that may occur when the rates reset. This knowledge can guide them in making informed decisions about mortgage options based on their financial situation and market trends.