What happens to the interest rate in an adjustable-rate mortgage during the loan term?

In an adjustable-rate mortgage (ARM), the interest rate is not fixed; instead, it is subject to change at specific intervals throughout the loan term. This variability allows the interest rate to be adjusted according to a predetermined index or benchmark rate. As a result, the interest rate on the loan may increase or decrease based on changes in market conditions or movements in the index to which the loan is tied.

This characteristic of ARMs is crucial for borrowers to understand because it can affect monthly payment amounts significantly over time. The adjustments typically happen after an initial fixed-rate period, which can last for a few years, and thereafter, the rate may change periodically based on the terms outlined in the loan agreement. This flexibility can provide initially lower rates compared to fixed-rate mortgages, but it carries the risk of rising rates in the future, which could lead to higher monthly payments.

In summary, the nature of adjustable-rate mortgages allows for the possibility of both increases and decreases in interest rates during the loan term, making it important for borrowers to be aware of potential fluctuations in their payment obligations.