What typically influences the interest rate of an adjustable-rate mortgage?

The interest rate of an adjustable-rate mortgage (ARM) is primarily influenced by market conditions over time. This is because an ARM typically has a set period of fixed interest rates followed by periods where the rate adjusts based on a specific index. These indices reflect prevailing market interest rates, which can fluctuate due to various factors including economic indicators, inflation, and central bank policies.

As market conditions change, lenders adjust the rates offered on ARMs accordingly. For instance, if the general market interest rates rise due to economic tightening, the interest rates on ARMs will likely increase during their adjustable periods, impacting the borrower's payments. Conversely, if market conditions lead to lower rates, this may result in decreased payments for the borrower.

While aspects such as the borrower’s credit score, the value of the property, and the type of property being financed can affect the overall loan approval process or fixed-rate terms, they are less influential on the specific adjustments of the interest rate in an ARM. The connection to market conditions remains central to understanding how ARMs operate and how their interest rates change over time.