Which type of loan carries an interest rate that can change based on a specific index?

An adjustable-rate mortgage (ARM) carries an interest rate that can fluctuate based on a specific index. This type of loan starts with a fixed interest rate for an initial period, after which the rate adjusts periodically according to changes in the index to which it is tied, such as the LIBOR or the Treasury index. This adjustment means that the borrower's monthly payments can increase or decrease over time, depending on the prevailing interest rates in the market.

In contrast, a fixed-rate mortgage maintains the same interest rate throughout the life of the loan, providing stable monthly payments and predictable budgeting for the borrower. Conventional loans can be either fixed-rate or adjustable-rate, but the defining characteristic is that they are not insured or guaranteed by the government. A home equity loan typically features a fixed interest rate as well, allowing borrowers to access the equity in their homes without the variability associated with an ARM. Thus, an adjustable-rate mortgage is the only loan type among the options listed that inherently includes the aspect of interest rate changes based on an index.