How is an adjustable-rate mortgage defined?

An adjustable-rate mortgage (ARM) is best defined as a mortgage that has an interest rate that can change over time, typically in relation to a specific benchmark or index. This means that the interest rate can fluctuate, resulting in varying monthly payments depending on the performance of the underlying index.

The key characteristic of an ARM is that interest rates are not fixed; instead, they adjust at predetermined intervals (such as annually) based on the movement of the associated index, which can include factors like the rates on Treasury securities, the London Interbank Offered Rate (LIBOR), or other financial market indices. This mechanism provides borrowers with potentially lower initial rates compared to fixed-rate mortgages, but it also introduces the risk of increasing payments over time if interest rates rise.

In contrast, the other options describe interest rate structures that do not reflect the nature of an ARM. Fixed interest rates remain constant throughout the life of the loan, while graduated rates imply a gradual increase over time but still do not adjust based on an external index. A sliding interest rate is not a standard term used in mortgage lending and does not convey the specific mechanics of how ARMs function.