Florida Real Estate Sales Associate Examination Content OutlineReal Estate Contracts and AgencyEasy
A real estate transaction involves a mortgage where the interest rate can fluctuate based on an economic index. This type of mortgage is known as a(n):
- AAdjustable-rate mortgage (ARM)
- BReverse mortgage
- CFixed-rate mortgage
- DBalloon mortgage
Show answer & explanationAnswer & explanation
Correct answer: A. Adjustable-rate mortgage (ARM)
An Adjustable-Rate Mortgage (ARM) is a loan where the interest rate changes periodically based on an index, allowing for fluctuating payments.
Why the other options are wrong
- B. A reverse mortgage allows homeowners to convert home equity into cash, usually for seniors, and is not defined by a fluctuating interest rate based on an index.
- C. A fixed-rate mortgage has an interest rate that remains constant throughout the life of the loan.
- D. A balloon mortgage has a large lump sum payment due at the end of the loan term, not necessarily a fluctuating interest rate.
Adjustable-Rate Mortgage (ARM)
A type of mortgage in which the interest rate applied on the outstanding balance varies throughout the life of the loan. The initial interest rate is fixed for a period, after which it resets periodically.
- Interest rate fluctuates
- Linked to an economic index
- Payments can increase or decrease
Memory trick: Fixed is stable, Adjustable is active, Balloon has a big bump, Reverse gives cash back.