What type of interest rate can change over time depending on market conditions?

The type of interest rate that can change over time depending on market conditions is known as an adjustable-rate mortgage (ARM). In contrast to a fixed-rate mortgage, where the interest rate remains constant throughout the life of the loan, an ARM has an interest rate that is typically tied to a specific index. This means that as market interest rates fluctuate, the rate on an ARM can increase or decrease at predetermined intervals, which may be annually, semi-annually, or at other specified time frames.

This feature makes ARMs attractive to some borrowers who may initially benefit from lower rates compared to fixed-rate mortgages. However, it also introduces the risk of payment increases if market rates rise, which can significantly impact a borrower's budget and financial planning.

In summary, the defining characteristic of an adjustable-rate mortgage is its variability tied to market conditions, which distinguishes it from other options like the fixed-rate mortgage, which is stable and predictable throughout the loan term.