California Real Estate Broker ExaminationFinancingMedium
A buyer is considering a mortgage where the interest rate is fixed for the initial five years and then adjusts annually based on a specified index. Which type of loan is this buyer most likely considering?
- AGraduated payment mortgage
- BFixed-rate mortgage
- CHybrid adjustable-rate mortgage (ARM)
- DReverse mortgage
Show answer & explanationAnswer & explanation
Correct answer: C. Hybrid adjustable-rate mortgage (ARM)
A hybrid adjustable-rate mortgage (ARM) offers a fixed interest rate for an initial period, after which it becomes adjustable, aligning with the scenario described.
Why the other options are wrong
- A. A graduated payment mortgage has lower initial payments that gradually increase over time, not related to interest rate adjustments.
- B. A fixed-rate mortgage maintains the same interest rate for the entire loan term.
- D. A reverse mortgage allows homeowners to convert home equity into cash, typically for seniors, and does not fit this description.
Hybrid ARM
A type of adjustable-rate mortgage (ARM) that offers a fixed interest rate for an initial period, after which the rate adjusts periodically.
- Combines fixed-rate and adjustable-rate features.
- Initial period has a stable, predictable payment.
- Rate adjustments occur after the initial fixed period.
Memory trick: Hybrid loans offer a 'best of both' world initially, then adapt.