What characterizes an adjustable-rate mortgage (ARM)?

An adjustable-rate mortgage (ARM) is characterized by a changing interest rate that is tied to a specific financial index. This means that the interest rate can fluctuate at predetermined intervals based on the performance of that index, which typically reflects broader economic indicators. As the index rate changes, so does the borrower's interest rate, which can lead to lower initial payments compared to fixed-rate mortgages but also entails the risk of increased payments in the future, depending on market conditions.

The other options do not accurately describe the nature of an ARM. While some ARMs may initially offer lower interest rates for a period, this characteristic alone does not define all ARMs, hence option C is too narrow. Similarly, a fixed interest rate throughout the loan's term, as stated in option A, is the hallmark of fixed-rate mortgages, not ARMs. Lastly, option D inaccurately suggests that ARMs are only available for government loans; in fact, they can be issued by both government and private lenders. Thus, the correct understanding of ARMs hinges on their core feature of interest rates that vary based on a financial index.