A borrower who secures a loan with fluctuating rates based on a market index is using what type of mortgage?

When a borrower secures a loan with fluctuating rates based on a market index, they are using an adjustable rate mortgage (ARM). This type of mortgage is characterized by its interest rate, which is not fixed but instead varies over time. The rate is typically tied to a specific financial index, such as the London Interbank Offered Rate (LIBOR) or the U.S. Treasury Bill rate. As the index fluctuates, so does the interest rate on the mortgage, which can lead to lower initial payments if interest rates are low but may increase the borrower's payments if rates rise.

Contrasting with fixed-rate mortgages, where the interest rate remains stable for the life of the loan, ARMs provide potential cost savings during periods of lower interest rates but also carry the risk of payment increases when rates rise. Hybrid mortgages are a combination of fixed and adjustable-rate features, where the fixed period may last for several years before transitioning to an adjustable rate. Conventional mortgages typically refer to loans that adhere to guidelines set by Fannie Mae and Freddie Mac and can be either fixed or adjustable, but do not specifically indicate fluctuating rates tied to a market index.