Which mortgage type has an interest rate that adjusts according to market fluctuations?

An adjustable-rate mortgage (ARM) is designed to have an interest rate that fluctuates with changes in the market, specifically tied to a particular index. When market interest rates rise or fall, the rates on an ARM adjust accordingly, usually at predetermined intervals (such as annually). This type of mortgage begins with a lower initial rate that is fixed for a certain period, after which it adjusts based on market conditions. This feature can make ARMs more affordable initially, but borrowers should be aware that payments can increase significantly if interest rates rise.

In contrast, a fixed-rate mortgage locks in a consistent interest rate for the entire loan term, providing predictability in monthly payments. A home equity line of credit typically has variable interest rates but functions differently as it allows homeowners to borrow against their equity rather than being a primary mortgage. A reverse mortgage is designed for elderly homeowners, allowing them to convert their home equity into loan proceeds without monthly payments, and typically also does not have a fluctuating rate in the same context as an ARM does. Thus, the characteristics of an adjustable-rate mortgage make it the correct response in this scenario.