What is an adjustable-rate mortgage (ARM)?

An adjustable-rate mortgage (ARM) is characterized by its interest rate that can fluctuate over time rather than remaining fixed for the entire duration of the loan. This type of mortgage typically starts with a lower interest rate for an initial period, after which the rate adjusts at predetermined intervals based on a specific index or benchmark. The intention behind this design is to reflect changes in market conditions, which can lead to lower initial payments compared to fixed-rate mortgages. However, borrowers should be aware that as interest rates rise or fall, their payments will similarly increase or decrease, adding an element of uncertainty to future budgeting.

The other options describe mortgage types that do not align with the characteristics of an ARM. A fixed-rate mortgage maintains the same interest rate throughout the loan's life, while a loan with no interest does not exist in conventional lending configurations. Additionally, although there are specific loan products aimed at rental properties, an ARM is not limited to just property types; it can be applied to various property purchases. Thus, the definition of an adjustable-rate mortgage hinges on its variable interest nature influenced by market conditions.