In an adjustable-rate mortgage, when does the interest rate change?

In an adjustable-rate mortgage (ARM), the interest rate changes at specified intervals based on market conditions. This type of mortgage typically includes a margin and an index, where the interest rate is determined by adding a fixed margin to the index rate, which reflects current market conditions. The adjustments usually occur after an initial fixed-rate period and can happen annually, semi-annually, or at other predefined intervals as stipulated in the loan agreement.

Understanding the mechanics of an ARM is crucial, as it allows borrowers to benefit from lower initial interest rates while being aware that the rate can increase in response to market changes, potentially affecting their monthly payments. This feature distinguishes ARMs from fixed-rate mortgages, where the interest rate remains constant for the life of the loan, making option C the accurate description of how interest rates in ARMs are set to change.