How does an adjustable-rate mortgage (ARM) affect monthly loan payments?

An adjustable-rate mortgage (ARM) is designed to have interest rates that change periodically, which directly affects monthly loan payments. When interest rates fluctuate due to market conditions, the monthly payments can increase or decrease accordingly. This variability is a fundamental characteristic of ARMs. Borrowers start with a lower initial interest rate that is often fixed for a certain period, after which the rate adjusts based on the terms set in the loan agreement, leading to changes in the amount owed each month.

The other choices do not accurately describe the nature of ARMs. Unlike fixed-rate mortgages where payments remain constant, ARMs are specifically intended to fluctuate with the interest rate. The claim that payments will decrease automatically each year or that they will only be adjusted once every five years misrepresents how ARMs function; adjustments can happen more frequently and depend on current market conditions, not just on a set schedule.