What is an adjustable-rate mortgage (ARM) typically tied to?

An adjustable-rate mortgage (ARM) is typically tied to a financial index that dictates rate changes over time. This means that the interest rate on an ARM is not fixed for the entire loan term but instead varies based on the movement of a specific index, such as the London Interbank Offered Rate (LIBOR) or the U.S. Treasury rates. As the index fluctuates, the interest rate on the ARM also adjusts, which can lead to changes in monthly mortgage payments.

A key feature of ARMs is the relationship between their interest rates and this chosen index, influencing how borrowers experience changes in their payments throughout the life of the loan. This can offer lower initial rates compared to fixed-rate mortgages, but also introduces the risk of rate increases in the future, affecting affordability and budgeting for borrowers. Understanding this relationship between ARMs and the financial index is essential for borrowers when considering their options for mortgage financing.