What defines an adjustable-rate mortgage?

An adjustable-rate mortgage (ARM) is defined by its feature of having a fluctuating interest rate, which means that the interest rate can change based on the performance of a specific financial index. This type of mortgage typically starts with a lower initial interest rate, often fixed for a certain period, before adjusting periodically. As market conditions shift, this variable rate can go up or down, affecting the monthly payments that the borrower must make.

This adjustable nature is a key characteristic that helps distinguish ARMs from fixed-rate mortgages, which maintain the same interest rate for the entire term of the loan. Short-term mortgages and government-backed mortgages do not inherently imply variability in interest rates, further clarifying why the defining characteristic of an adjustable-rate mortgage is its varying interest rate.