What is an "adjustable-rate mortgage" (ARM)?

An adjustable-rate mortgage (ARM) is characterized by its ability to have the interest rate change periodically over the life of the loan. This adjustment is typically tied to a specific financial index, which means that the interest rate can fluctuate based on market conditions. This type of mortgage often starts with a lower initial interest rate compared to fixed-rate mortgages, making it appealing to borrowers who are looking for lower payments at the beginning of the loan. As interest rates adjust, however, the payments can increase or decrease, which is a fundamental aspect that differentiates ARMs from fixed-rate mortgages, where the interest rate remains the same throughout the entire term.

The other options describe different scenarios that do not accurately capture the nature of an ARM. A fixed-rate mortgage has a stable interest rate, and the definitions related to luxury homes or first-time buyers do not pertain to the adjustable characteristics of an ARM.