What characterizes an adjustable-rate mortgage (ARM)?

An adjustable-rate mortgage (ARM) is characterized by the fact that the interest rate can change during the mortgage term based on market interest rates. This type of mortgage typically starts with a lower initial interest rate compared to fixed-rate mortgages, and after an introductory period, the rate fluctuates at specified intervals, reflecting changes in a designated financial index.

This variability in interest rates means that monthly payments can vary over time, potentially increasing as market rates rise, which can impact budgeting and financial planning for borrowers. Borrowers should be aware of this characteristic, as it presents both opportunities for lower initial payments and potential risks of increasing payments in the future.

The other options do not accurately represent the nature of an ARM. An interest rate that remains constant throughout the loan period defines a fixed-rate mortgage, while higher monthly payments can occur under certain circumstances but are not an inherent characteristic of ARMs alone. Lastly, while ARMs can be structured for various terms, they are not limited to short-term loans.