Describe "Adjustable-Rate Mortgages (ARMs)"?

Adjustable-Rate Mortgages (ARMs) are specifically designed to have interest rates that fluctuate over the life of the loan. This means that the interest rate is not fixed, but instead adjusts at specified intervals according to changes in market conditions, usually tied to a financial index. Consequently, the monthly payments can vary significantly over time, depending on how the interest rate changes.

This feature of ARMs can be advantageous in a declining interest rate environment, allowing borrowers to potentially benefit from lower rates over time. However, it also presents a risk in rising interest rate environments, where the cost of borrowing may increase, leading to higher monthly payments.

The other choices do not accurately describe ARMs. Fixed-rate mortgages remain constant throughout the loan term, while down payment requirements and prepayment penalties do not differentiate ARMs from other forms of mortgages, as these can vary across different mortgage products.