What happens to an adjustable-rate mortgage?

An adjustable-rate mortgage (ARM) is designed to fluctuate with market conditions, which is why the correct answer highlights that it changes periodically based on these conditions. ARMs typically start with a fixed interest rate for an initial period (such as 5, 7, or 10 years), after which the rate adjusts at predetermined intervals, often annually. The adjustments depend on a specific index, which reflects current market rates. This feature allows borrowers to benefit from lower initial rates when interest rates are favorable while also exposing them to potential increases if market rates rise.

The characteristic of periodic rate changes distinguishes ARMs from fixed-rate mortgages, which maintain the same interest rate throughout the loan term, offering a different risk and payment stability scenario for borrowers. Given that the interest rate can decrease or increase based on market trends, it retains a fluid nature that can both benefit or challenge homeowners, depending on economic conditions. Therefore, understanding the mechanics of these changes is crucial for anyone engaging with adjustable-rate financing.