In mortgage financing, what does adjustable-rate mortgage (ARM) mean?

An adjustable-rate mortgage (ARM) is characterized by having variable interest rates that can adjust periodically over the life of the loan. This means that the interest rate on the loan is not fixed; instead, it changes at specified intervals based on market conditions or an underlying index. This feature can lead to lower initial payments compared to fixed-rate mortgages, but it also introduces the risk that monthly payments may increase over time as the interest rates rise.

This concept is important in mortgage financing because it provides borrowers with a flexible option that might suit their financial situation, especially if they expect interest rates to remain low or if they plan to move or refinance before any potential increases in their mortgage payments. Understanding how these adjustments work is crucial for loan officers as they guide borrowers in making informed decisions about their mortgage options.