How does an adjustable-rate mortgage (ARM) differ from a fixed-rate mortgage?

An adjustable-rate mortgage (ARM) often has a lower initial interest rate compared to a fixed-rate mortgage. This lower starting rate can make ARMs more attractive to borrowers, especially in the early years of the loan, as it can lead to lower initial monthly payments. The initial rate is typically fixed for a certain period, after which it can adjust periodically based on a specified index plus a margin. This initial lower rate can help buyers make homeownership more accessible or allow them to buy more home than they could afford if they only considered fixed-rate options.

The other aspects associated with ARMs, such as the potential for rising interest rates after the initial period, highlight the risks involved, but the initial rate advantage is a key feature that distinguishes it from fixed-rate mortgages. The nature of ARMs is not limited to first-time homebuyers, and while down payment requirements can vary, they are not inherently larger than those for fixed-rate mortgages. Hence, the distinction of a lower initial interest rate is a defining characteristic of ARMs.