What is a defining characteristic of an Adjustable Rate Mortgage (ARM)?

An Adjustable Rate Mortgage (ARM) is particularly defined by the fact that the interest rate is tied to a specific index plus a margin. This characteristic sets ARMs apart from fixed-rate mortgages, where the interest rate remains constant throughout the loan term.

In an ARM, the initial interest rate is usually lower than that of a fixed-rate mortgage, making it an attractive option for some borrowers. However, the rate can change periodically, depending on fluctuations in the underlying index to which it is linked. This means that as the index rises or falls, the interest payments on the mortgage can increase or decrease, impacting the borrower’s monthly payment amounts over the life of the loan. The addition of a margin, set by the lender, ensures that the lender can maintain profitability even as the market index fluctuates.

This feature of being index-driven is fundamental to the ARM's structure and explains why the answer is correct. Other options, like suggesting that there are fixed interest rates for the entire term or that no interest payments are made, inaccurately characterize the nature of ARMs.