New York Real Estate Salesperson ExaminationFinancingEasy
A buyer is considering two mortgage options: one with a fixed interest rate for the entire loan term and another with an interest rate that adjusts periodically based on an index. Which type of mortgage carries the risk of increased monthly payments over time?
- AGraduated payment mortgage
- BReverse mortgage
- CAdjustable-rate mortgage (ARM)
- DFixed-rate mortgage
Show answer & explanationAnswer & explanation
Correct answer: C. Adjustable-rate mortgage (ARM)
An Adjustable-Rate Mortgage (ARM) has an interest rate that changes periodically, which can lead to variations in monthly payments, including increases, depending on market conditions.
Why the other options are wrong
- A. A graduated payment mortgage has payments that start low and increase over time, but the rate itself is often fixed.
- B. A reverse mortgage allows homeowners to convert home equity into cash, usually paid out in installments, and does not involve periodic rate adjustments that increase borrower payments.
- D. A fixed-rate mortgage has a constant interest rate and predictable payments throughout the loan term.
Adjustable-Rate Mortgage (ARM)
A mortgage loan with an interest rate that changes periodically based on an index, which can cause monthly payments to increase or decrease.
- Interest rate fluctuates with market conditions.
- Initial interest rate is often lower than fixed-rate mortgages.
- Carries the risk of increased monthly payments over time.
Memory trick: ARMs can climb or fall, like a mountain's call.