Massachusetts Real Estate License Practice Test 2025 – The All-in-One Guide to Master Your Exam!

An adjustable-rate mortgage (ARM) is characterized by its interest rate adjustments that occur at predetermined intervals. This means that unlike a fixed-rate mortgage, where the interest rate remains constant throughout the life of the loan, an ARM has a variable interest rate that can change based on specific benchmarks, such as market interest rates or indexes. These adjustments typically happen after an initial period of fixed interest, which is often lower than that of a fixed-rate mortgage.

This feature allows borrowers the possibility of lower initial payments but includes the risk of increasing payments in the future as the rate adjusts. The adjustments are usually detailed in the loan agreement, specifying when and how often the rates can be adjusted, along with caps that limit how much the interest rate can increase at each adjustment and over the life of the loan. Understanding this mechanism is crucial for borrowers as it impacts their overall repayment strategy and financial planning.