What type of interest rate can a borrower expect on an adjustable-rate mortgage (ARM)?

A borrower can expect a variable interest rate on an adjustable-rate mortgage (ARM) that fluctuates based on market conditions. This type of mortgage has an interest rate that initially may be lower than that of fixed-rate mortgages but will adjust periodically after an introductory period. The adjustments are determined by a specific index, such as the LIBOR or the U.S. Treasury yield, plus a margin set by the lender.

This variability means that the borrower's interest payments can increase or decrease over time, depending on the performance of the index used for adjustments. The nature of ARMs allows borrowers to potentially benefit from lower initial rates, but it also introduces the uncertainty of future rate increases based on market changes. Recognizing the dynamics of ARMs is crucial for borrowers when considering their long-term financial plans and budgeting.