What characterizes an 'adjustable-rate mortgage' (ARM)?

An adjustable-rate mortgage (ARM) is specifically characterized by an interest rate that can change over the life of the loan, typically in relation to a benchmark interest rate or index. This means that the monthly payment can fluctuate based on the changes in this index, which can be tied to various economic factors such as inflation or the prime interest rate.

The defining aspect of an ARM is this variability; the initial rate may be set lower than that of a fixed-rate mortgage, but it is subject to adjustments after a specified period. This adjustment can impact the borrower’s financial planning, as subsequent payments may increase or decrease depending on the performance of the index to which the ARM is linked.

In contrast, a fixed-rate mortgage maintains the same interest rate throughout the loan term, offering predictability in monthly payments. The other options either imply stability in interest (as seen in fixed-rate mortgages) or non-traditional loan structures (like loans without monthly payments), which do not align with the defining feature of an ARM.