Which loan term specifies the interest rate can change over time?

The adjustable-rate mortgage (ARM) is characterized by an interest rate that can change over time based on a specific index or benchmark rate. This means that the monthly payment amount can fluctuate as interest rates rise or fall. Typically, ARMs start with a lower fixed interest rate for an initial period, after which the rate is adjusted at regular intervals according to the terms set forth in the loan agreement.

In contrast, a fixed-rate mortgage has a stable interest rate that remains the same throughout the life of the loan, allowing borrowers to predict their monthly payments. A balloon mortgage often starts with lower initial payments that can later result in a large final payment due at the end of a specified term, but it does not adjust interest rates based on an index. Conventional mortgages can refer to various types of loans that are not backed by the government, many of which may be fixed-rate or adjustable-rate, but the defining feature of changing interest rates specifically applies to ARMs. Therefore, the adjustable-rate mortgage is the clear choice for a loan term where the interest rate can change.