Which mortgage adjusts its interest rate based on current financial markets?

An adjustable-rate mortgage (ARM) is designed to have its interest rate adjusted periodically based on current financial market conditions. This means that after an initial fixed-rate period, the interest payments can fluctuate, potentially increasing or decreasing based on a specified index. This option is beneficial for borrowers who expect interest rates to remain stable or decrease, as it may lead to lower initial monthly payments compared to a fixed-rate mortgage.

In contrast, a fixed-rate mortgage maintains a constant interest rate throughout the life of the loan, regardless of market fluctuations. This stability can be advantageous for budgeting but does not provide the flexibility that an ARM offers.

A hybrid mortgage features a combination of fixed and adjustable rates, with an initial fixed rate followed by adjustments, but it's still not as flexible as a standard ARM since it only adjusts after the fixed period.

A balloon mortgage typically offers low initial payments for a specific period, followed by a large final payment, but does not adjust interest rates based on market conditions like an ARM.

Therefore, the adjustable-rate mortgage stands out as the only option that directly links its interest rate to the current financial markets.