What type of mortgage has an interest rate that can change over time?

An adjustable-rate mortgage (ARM) features an interest rate that can fluctuate over time based on market conditions or a specific index. This type of mortgage typically starts with a lower initial interest rate, which may be fixed for a certain period. After this initial period ends, the interest rate adjusts at predetermined intervals, which may lead to changes in the monthly payment amount. The adjustments are generally influenced by market interest rates, which means borrowers can experience payments that increase, decrease, or remain stable over the life of the loan.

In contrast, a fixed-rate mortgage offers a consistent interest rate throughout the loan term, ensuring that monthly payments remain the same. A conventional mortgage refers broadly to any mortgage that is not insured or guaranteed by a government entity and can be fixed or adjustable. Lastly, a balloon mortgage is characterized by lower monthly payments that lead to a large final payment at the end of the term and does not typically involve the regular interest rate changes associated with ARMs.