Which type of mortgage is characterized by a fluctuating interest rate?

An adjustable rate mortgage (ARM) is characterized by a fluctuating interest rate, which means that the interest rate can change over time based on market conditions or specific index rates. This type of mortgage typically starts with a lower initial rate that may be fixed for a set period before adjusting at regular intervals. The adjustments are typically tied to various indices, meaning that the borrower's payments can increase or decrease over the life of the loan, leading to the potential for a more variable monthly payment.

The significance of this type of mortgage lies in its ability to offer lower initial rates compared to fixed-rate mortgages, making it an attractive option for many borrowers, especially those who anticipate moving or refinancing before the first adjustment period. Understanding how the interest rate can change helps borrowers plan their finances and assess the risks associated with ARMs effectively.