What is a key characteristic of an adjustable-rate mortgage?

An adjustable-rate mortgage (ARM) is defined by its interest rate structure, which is designed to fluctuate over time. This characteristic sets it apart from fixed-rate mortgages, where the interest rate remains constant throughout the term of the loan. In an ARM, the initial interest rate is often lower than that of a fixed-rate mortgage, but after an initial period, the rate adjusts periodically based on the performance of a specified index, such as Treasury rates or the London Interbank Offered Rate (LIBOR). This means borrowers could experience changes to their monthly payments if interest rates rise or fall, making the potential for fluctuation a fundamental aspect of ARMs.

In contrast, the other choices do not accurately reflect the nature of adjustable-rate mortgages. While some ARMs may offer lower initial rates, this is not a defining characteristic because not all ARMs will always guarantee lower rates throughout their term. The structure of ARMs does involve market indices but does not specify that they are always fixed; instead, they are based on the movement of those indices. Lastly, down payment requirements for ARMs do not inherently differ from those of fixed-rate mortgages; instead, they are typically determined by various factors, including lender policies and borrower qualifications rather than the type of mortgage itself.