What distinguishes an adjustable-rate mortgage (ARM) from a fixed-rate mortgage?

An adjustable-rate mortgage (ARM) is distinguished from a fixed-rate mortgage primarily by its interest rate structure. In an ARM, the interest rate is not fixed for the life of the loan; rather, it fluctuates based on market conditions and index rates, which means it can increase or decrease over time. This characteristic allows borrowers to potentially benefit from lower initial rates compared to fixed-rate mortgages, which maintain the same rate throughout the entire term of the loan.

The concept behind ARMs is linked to their adjustment periods, where the interest rate is re-evaluated and modified at specified intervals, which can sometimes lead to lower monthly payments initially but also introduces uncertainty and fluctuation in future payments. Consequently, borrowers must be prepared for potential increases in their payments as market conditions change.

In contrast, fixed-rate mortgages provide stability with a consistent interest rate for the life of the loan, making them preferable for those who favor predictability in their financial planning. The features of ARMs, such as varying rates and potential for lower initial payments, make them appealing to certain buyers, particularly if they plan to move or refinance before the adjustments have a chance to significantly impact their payments.