Florida Real Estate Sales Associate Examination Content OutlineReal Estate FinanceMedium
A lender is offering a loan with an initial interest rate of 4%, which is fixed for the first five years. After this period, the interest rate will adjust annually based on an index plus a margin. This type of loan is known as a(n):
- AFixed-rate mortgage
- BReverse mortgage
- CInterest-only loan
- DHybrid ARM
Show answer & explanationAnswer & explanation
Correct answer: D. Hybrid ARM
A hybrid ARM combines features of both fixed-rate and adjustable-rate mortgages. It has an initial fixed-rate period (e.g., 3, 5, 7, or 10 years), after which the rate becomes adjustable for the remainder of the loan term.
Why the other options are wrong
- A. A fixed-rate mortgage has an interest rate that remains constant for the entire loan term.
- B. A reverse mortgage allows homeowners to convert home equity into cash, typically for seniors, and does not describe the rate adjustment structure.
- C. An interest-only loan allows the borrower to pay only the interest for a set period, not describing the rate adjustment structure.
Hybrid ARM
A type of adjustable-rate mortgage (ARM) that offers a fixed interest rate for an initial period (e.g., 3, 5, 7, or 10 years) before adjusting periodically for the remainder of the loan term.
- Combines fixed-rate stability with adjustable-rate flexibility
- Designated by fixed period then adjustment frequency (e.g., 5/1 ARM)
- Initial fixed rate is often lower than a traditional fixed-rate mortgage
- Borrower faces interest rate risk after the fixed period
Memory trick: Hybrid ARM: 'Half Fixed, Half Floats' on the market.