Which type of mortgage allows the terms to be adjusted periodically?

An adjustable rate mortgage (ARM) is designed specifically to allow the interest rate to change periodically. This type of mortgage typically has a fixed rate for an initial period, after which the rate adjusts based on a specified index.

The periodic adjustments are determined by factors such as market conditions and the specific terms set forth in the mortgage agreement. Borrowers should be aware that these adjustments can lead to fluctuations in monthly payments, which can either increase or decrease based on the current interest rate environment.

This structure enables borrowers to potentially benefit from lower initial rates compared to fixed-rate mortgages, but it also carries the risk of rising payments if interest rates increase significantly in the future. Understanding the implications of an adjustable rate helps borrowers make informed decisions about their mortgage options.

In contrast, fixed rate mortgages maintain a constant interest rate for the duration of the loan, balloon mortgages have a large final payment after a series of smaller payments, and home equity loans are typically secured against the equity in a borrower's home and usually have fixed rates.