What type of mortgage loan is likely to have a fluctuating interest rate?

An adjustable-rate mortgage (ARM) is designed specifically to have a fluctuating interest rate, which is a fundamental characteristic of this loan type. The interest rate on an ARM is typically tied to a specific index and can change at predetermined intervals, leading to potential increases or decreases in monthly payments over the life of the loan. The initial interest rate is generally lower than that of a fixed-rate mortgage, but it will adjust according to market conditions after the initial fixed period.

Understanding how ARMs function is crucial for borrowers, as they carry the risk of rising rates that could significantly impact affordability in the long run. In contrast, fixed-rate mortgages maintain a steady interest rate throughout the loan term, providing stability and predictability in payment amounts. Short-term mortgages and conventional mortgages do not inherently imply variability in rates either; they can have fixed or adjustable rates depending on the specific loan agreement.