Florida Real Estate Broker ExaminationReal Estate Finance and InvestmentEasy
A Florida homeowner obtains a loan where the interest rate is tied to an economic index and can adjust periodically. This type of mortgage is known as a(n):
- AAdjustable-rate mortgage (ARM)
- BReverse mortgage
- CFixed-rate mortgage
- DGraduated payment mortgage
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 over time, typically tied to an economic index, leading to fluctuating monthly payments.
Why the other options are wrong
- B. A reverse mortgage allows homeowners to convert home equity into cash, usually for seniors.
- C. A fixed-rate mortgage has an interest rate that remains constant throughout the loan term.
- D. A graduated payment mortgage has lower initial payments that increase over time, but the rate can be fixed or adjustable.
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.
- Rate is tied to a specific economic index (e.g., LIBOR, SOFR).
- Includes adjustment periods, caps (periodic and lifetime), and a margin.
- Can lead to fluctuating monthly payments for the borrower.
Memory trick: ARM: Adjusting Rates Make payments.