What is typically a key feature of an adjustable-rate mortgage?

An adjustable-rate mortgage (ARM) is characterized by interest rates that can change over time. This feature allows the interest rate to adjust periodically based on fluctuations in a specified index, which can result in lower initial payments compared to fixed-rate mortgages. Borrowers may start with a lower interest rate, but they should be aware that the rate can increase or decrease in subsequent adjustment periods, affecting their monthly payments. Understanding this characteristic is crucial, as it can significantly impact overall loan costs and payment structures throughout the life of the loan.

While fixed payments throughout the term, higher initial borrowing limits, and no penalties for early payment may be features of certain mortgage types, they do not apply to adjustable-rate mortgages in the same way. The defining aspect of an ARM is its variable interest rate, making it distinct in the mortgage landscape.