Final answer:
An adjustable-rate mortgage (ARM) is a type of loan that provides for increases and decreases in the interest rate during its term. The interest rate on an ARM varies based on market interest rates. Borrowers may be able to receive a lower interest rate with an ARM compared to a fixed-rate loan.
Step-by-step explanation:
An adjustable-rate mortgage (ARM) is a type of loan that provides for increases and decreases in the interest rate during its term. This means that the interest rate on the loan can vary based on market interest rates.
For example, if the inflation rate rises by two percentage points, the interest rate charged on the loan will rise by two percentage points as well. On the other hand, if the inflation rate decreases, the interest rate charged on the loan will also decrease.
With an ARM, the borrower may be able to receive a lower interest rate compared to a fixed-rate loan because the lender is protected against the risk of higher inflation reducing the real loan payments.