What type of mortgage typically has a lower initial rate but may increase over time?

An adjustable-rate mortgage (ARM) typically has a lower initial interest rate compared to fixed-rate mortgages. This lower initial rate is usually offered for a set period, after which the rate may change periodically based on market conditions or specific indexes such as the LIBOR or SOFR.

The structure of an ARM is designed to provide lower initial payments which can be appealing to borrowers looking to save money in the early years of their mortgage. However, because the rate is not fixed, it can increase after the initial period ends, resulting in higher monthly payments in the future. This format can lead to significant cost increases for borrowers if interest rates rise, making it crucial for them to understand the implications and potential for variability in their future payment amounts.

In contrast, fixed-rate mortgages maintain the same interest rate throughout the loan's term, and conventional mortgages can refer to various types of loans but do not inherently encompass adjustable rates. Interest-only mortgages allow borrowers to pay only the interest for a certain period and then start paying principal, which does not directly relate to the scenario described about fluctuating rates.