Texas Real Estate Sales Agent ExamFinancingEasy
A borrower is seeking a loan to purchase a single-family home. The lender is offering a loan where the interest rate can fluctuate over the life of the loan based on an economic index. What type of loan is this?
- AAdjustable-Rate Mortgage (ARM)
- BReverse mortgage
- CFixed-rate mortgage
- DGraduated Payment Mortgage (GPM)
Show answer & explanationAnswer & explanation
Correct answer: A. Adjustable-Rate Mortgage (ARM)
An Adjustable-Rate Mortgage (ARM) is characterized by an interest rate that can change periodically over the loan term, tied to a specific economic index.
Why the other options are wrong
- B. A reverse mortgage allows homeowners to convert home equity into cash and has different characteristics.
- C. A fixed-rate mortgage maintains the same interest rate throughout the loan's life.
- D. A Graduated Payment Mortgage (GPM) has payments that increase over time, but the interest rate itself isn't necessarily fluctuating based on an index.
Adjustable-Rate Mortgage (ARM)
A mortgage loan where the interest rate is not fixed for the entire term but can fluctuate based on an underlying economic index.
- Rate changes periodically (e.g., annually) after an initial fixed period.
- Tied to an index (e.g., LIBOR, SOFR, Treasury rates).
- Includes caps on how much the rate can change.
Memory trick: Rates can be fixed like a rock or adjustable like a thermostat.