Which type of mortgage loan is linked to a publicly available index agreed upon by both lender and borrower?

An adjustable-rate mortgage (ARM) is linked to a publicly available index that both the lender and borrower agree upon. The interest rate on an ARM varies over time, usually in relation to changes in the index. This means that initially, the borrower might enjoy a lower fixed interest rate for a certain period, after which the rate adjusts periodically based on the performance of the agreed-upon index, such as the London Interbank Offered Rate (LIBOR) or the Treasury yield.

The advantage of an ARM is that it often starts with a lower initial rate compared to fixed-rate mortgages, which can be beneficial for borrowers who anticipate increased income or plan to sell or refinance before significant adjustments occur. However, it's important for borrowers to understand that their payments may fluctuate, leading to potentially higher costs in the future depending on the movements of the index.

In contrast, a renegotiable rate mortgage allows for periodic adjustments of the interest rate, but these terms can be less tied to an index and more dependent on renegotiations. A graduated payment mortgage involves payments that increase over time but does not link to an index. Freddie Mac is a government-sponsored enterprise that primarily deals with mortgage financing rather than being a type of mortgage loan.