What characterizes an adjustable rate mortgage (ARM)?

An adjustable rate mortgage (ARM) is characterized by the fact that the interest rate changes periodically. This means that the interest rate on the loan is typically tied to a specific index and can fluctuate at set intervals, such as annually or every few years. This feature can lead to lower initial payments when compared to a fixed-rate mortgage, as the starting rate may be lower, but it can also result in higher payments later if interest rates rise.

In contrast, other options do not accurately reflect the nature of an ARM. For instance, while the initial rate may sometimes be lower than a fixed rate mortgage, it is not guaranteed to always be higher (as suggested in the option about the interest rates). Furthermore, an ARM cannot have an interest rate that remains the same for the entirety of the loan term, as that would define it more like a fixed-rate mortgage. Lastly, the monthly payment for an ARM can vary depending on the interest rate adjustments, and thus the payment does not remain unchanged throughout the loan.