What type of mortgage adjusts its interest rate periodically based on a predetermined index?

The adjustable rate mortgage (ARM) is designed with an interest rate that fluctuates over time based on a specific index. This means that the interest rate and, consequently, the monthly payments can change after an initial fixed period, reflecting current market conditions and providing the borrower with the potential for lower initial rates compared to fixed-rate mortgages.

The structure of ARMs includes provisions detailing how often the interest rate can adjust, the specific index it will follow (such as LIBOR or the U.S. Treasury index), and the limits on how much it can change at each adjustment (known as caps). This adaptability allows borrowers to take advantage of potentially lower rates over time, although it also introduces the risk of rate increases leading to higher monthly payments in the future.

Other terms, such as "variable mortgage" and "floating mortgage," while they might suggest similar concepts, do not encapsulate the specific features and periodic adjustments characteristic of adjustable rate mortgages. Thus, the correct identification of the type of mortgage that adjusts its interest rate based on a predetermined index is indeed the adjustable rate mortgage.