How does an ARM differ from a traditional fixed-rate mortgage?

An adjustable-rate mortgage (ARM) differs from a traditional fixed-rate mortgage primarily because the interest rate on an ARM can fluctuate over time based on changes in market conditions, typically tied to a specific index, along with an applicable margin. This means that the monthly payment can vary throughout the life of the loan, depending on the prevailing interest rates after an initial fixed period, if applicable.

In contrast, a fixed-rate mortgage maintains a constant interest rate and regular monthly payments for the duration of the loan, providing borrowers with stability and predictability in their budgeting. The ability for an ARM's interest rates to change can present both potential benefits—such as lower initial rates—and risks, as borrowers could face higher payments if interest rates rise after the initial fixed period. Therefore, understanding the nature of ARMs is crucial for evaluating loan options, especially in terms of risk and payment forecasting.