What happens to the interest rate on an ARM over time?

An adjustable-rate mortgage (ARM) typically has an interest rate that can fluctuate periodically based on market conditions. The arm's interest rate is often tied to a specific financial index, meaning it will adjust at predetermined intervals—such as annually or every few years—depending on the terms outlined in the loan agreement. This means that borrowers might see their interest rate increase, which can lead to higher monthly payments if the rates go up.

This flexibility allows lenders to adjust rates in accordance with changes in the financial market, reflecting prevailing economic conditions. Therefore, the characteristic of an ARM that may lead to an increase in interest rates at scheduled intervals is an essential feature of how these mortgages function, making it the correct answer.

The other options provided describe scenarios that do not align with how ARMs work. For instance, the idea that the interest rate decreases automatically is misleading; any decrease would similarly depend on market conditions and not occur on its own. Likewise, stating that the interest rate stays fixed for the entire loan term contradicts the very nature of adjustable-rate loans, which are designed to change over time. Finally, the notion that the interest rate is non-existent until the loan is paid off confuses the concept of interest; it is always a factor in