What is an adjustable-rate mortgage (ARM)?

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An adjustable-rate mortgage (ARM) is characterized by its changing interest rates that fluctuate based on market conditions. This type of mortgage typically has an initial fixed-rate period after which the interest rate adjusts at specified intervals, often in relation to an underlying index. As market interest rates rise or fall, the borrower's rate—and consequently their monthly payments—may also increase or decrease.

This distinction is essential because it reflects how ARMs tie into broader economic factors and the potential for cost savings or increased financial burden depending on market trends. Borrowers should be aware of these changes and how they can impact their ability to budget for mortgage payments over time.

In contrast to other choices, a fixed-rate mortgage is consistent and does not change throughout the life of the loan, a reverse mortgage involves different eligibility criteria and functions primarily for older homeowners to access equity, and a mortgage that does not allow refinancing would not align with the nature of ARMs, as refinancing may still be an option in various scenarios.

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