California Real Estate Broker ExaminationFinancingEasy
A buyer is securing a mortgage where the interest rate can fluctuate over the life of the loan based on an economic index. This type of loan is known as an:
- AAdjustable-rate mortgage (ARM)
- BFixed-rate mortgage
- CGraduated payment mortgage
- DInterest-only loan
Show answer & explanationAnswer & explanation
Correct answer: A. Adjustable-rate mortgage (ARM)
An Adjustable-Rate Mortgage (ARM) is a loan where the interest rate is not fixed for the entire term but can change periodically based on an index, such as the prime rate or LIBOR (though LIBOR is being phased out).
Why the other options are wrong
- B. A fixed-rate mortgage has an interest rate that remains constant throughout the life of the loan.
- C. A graduated payment mortgage has lower initial payments that gradually increase over time, but the interest rate itself isn't necessarily adjustable.
- D. An interest-only loan allows the borrower to pay only the interest for a set period, but the rate itself can be fixed or adjustable.
Adjustable-Rate Mortgage (ARM)
A type of mortgage loan where the interest rate is not fixed for the entire term of the loan. Instead, it adjusts periodically based on an underlying economic index, leading to fluctuating monthly payments.
- Interest rate changes over time
- Rate tied to an economic index (e.g., SOFR, prime rate)
- Monthly payments can increase or decrease
Memory trick: ARM has 'Adjusting' Rates, Fixed is 'Forever' same.