Which of the following is a characteristic of an adjustable-rate mortgage (ARM)?

An adjustable-rate mortgage (ARM) is characterized by its interest rate structure, where the interest rate fluctuates based on a specified index. This means that as the underlying index changes, the interest rate on the ARM may rise or fall, leading to changes in monthly payments over the life of the loan.

In addition to this variation in rates, ARMs typically start with lower initial payments compared to fixed-rate mortgages. This lower initial cost can make ARMs attractive to borrowers who may not plan to stay in their home for the entire loan term or who expect interest rates to remain stable or decrease in the future.

Therefore, the characteristics that define an ARM include both its link to a specified index for rate adjustments and the possibility of lower initial payments, making the combination of these features correct. These aspects are what distinguish ARMs from fixed-rate mortgages, which have consistent payments throughout the term of the loan.