Florida Real Estate Broker ExaminationReal Estate Finance and InvestmentEasy
A lender provides a mortgage loan where the interest rate can fluctuate based on an economic index. The loan includes a cap on how much the interest rate can increase over the life of the loan and a separate cap on how much it can increase in any single adjustment period. What type of loan is this?
- ABalloon mortgage
- BFixed-rate mortgage
- CGraduated payment mortgage
- DAdjustable-rate mortgage (ARM)
Show answer & explanationAnswer & explanation
Correct answer: D. Adjustable-rate mortgage (ARM)
An adjustable-rate mortgage (ARM) is characterized by an interest rate that changes periodically based on an index, often with caps to limit fluctuations.
Why the other options are wrong
- A. A balloon mortgage has a large lump-sum payment due at the end of the loan term, regardless of rate adjustments.
- B. A fixed-rate mortgage has an interest rate that remains constant for the life of the loan.
- C. A graduated payment mortgage has lower initial payments that increase over time, but the rate is typically fixed.
Adjustable-Rate Mortgage (ARM)
A mortgage loan with an interest rate that changes periodically based on an index, often with rate adjustment caps.
- Interest rate fluctuates with market conditions.
- Includes an index and a margin.
- Often has periodic and lifetime interest rate caps.
Memory trick: ARM: Rate moves, but Capped so it doesn't harm.