Which type of mortgage has its interest rate periodically adjusted?

An adjustable-rate mortgage (ARM) is a type of mortgage that features an interest rate that can change periodically. This adjustment typically occurs after an initial fixed-rate period, which might last for several years, after which the interest rate is adjusted based on a specific index plus a margin. The adjustable nature of the interest rate means that monthly payments on an ARM can fluctuate over time, reflecting changes in market interest rates.

This feature distinguishes ARMs from fixed-rate mortgages, where the interest rate remains constant over the life of the loan, ensuring predictable monthly payments. Subprime mortgages and reverse mortgages also serve different functions and target different borrower scenarios, but they do not inherently involve periodic adjustments of interest rates as ARMs do. Understanding the structure of ARMs is crucial for borrowers who want to manage their long-term financial commitments while also navigating changes in interest rates.