What is the primary difference between an adjustable-rate mortgage (ARM) and a fixed-rate mortgage?

The primary distinction between an adjustable-rate mortgage (ARM) and a fixed-rate mortgage lies in how the interest rate is structured over the life of the loan. An ARM features an interest rate that can change periodically based on market conditions, which means that the borrower's monthly payments can fluctuate over time. This rate adjustment is typically tied to an index, and specific intervals and caps on potential increases are defined in the loan agreement.

In contrast, a fixed-rate mortgage maintains a consistent interest rate throughout the duration of the loan. This stability allows borrowers to have predictability in their monthly payments, making financial planning easier. The fixed rate is set at the time of the loan origination, providing certainty regardless of changes in the market.

Understanding this fundamental difference is essential for borrowers when selecting a mortgage type that aligns with their financial strategy and risk tolerance.