Florida Real Estate Sales Associate Examination Content OutlineReal Estate FinanceEasy
A buyer is considering a mortgage where the interest rate can fluctuate based on a specified economic index. Which type of mortgage is this buyer most likely considering?
- AAdjustable-rate mortgage (ARM)
- BFixed-rate mortgage
- CBalloon mortgage
- DReverse mortgage
Show answer & explanationAnswer & explanation
Correct answer: A. Adjustable-rate mortgage (ARM)
An adjustable-rate mortgage (ARM) is characterized by an interest rate that adjusts periodically based on an index, making it suitable for buyers comfortable with fluctuating payments. Fixed-rate mortgages have constant rates, while balloon mortgages have a large final payment, and reverse mortgages convert home equity into cash.
Why the other options are wrong
- B. Fixed-rate mortgages maintain the same interest rate throughout the loan term, which does not align with the fluctuating rate described.
- C. A balloon mortgage features a large lump-sum payment at the end of the loan term, not a fluctuating interest rate.
- D. A reverse mortgage allows homeowners to convert home equity into cash, primarily for seniors, and does not involve fluctuating interest rates in the way described.
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.
- Interest rate adjusts periodically.
- Tied to an economic index (e.g., SOFR, LIBOR).
- Payments can increase or decrease.
Memory trick: ARMs adjust, fixed stays firm, balloons burst, reverse recycles.