What is an adjustable-rate mortgage (ARM)?

What is an adjustable-rate mortgage (ARM)?

• A. A loan that has a fixed interest rate for its entire term
• B. A loan with an interest rate that changes periodically
• C. A loan backed by the government
• D. A loan designed for first-time home buyers

Answer: (B)

An adjustable-rate mortgage (ARM) is characterized by an interest rate that fluctuates periodically, which is why the choice regarding a loan with an interest rate that changes periodically is the correct one. This type of mortgage starts with a fixed interest rate for an initial period, after which the rate adjusts based on changes in a corresponding financial index. This means that the payments may increase or decrease over time, depending on current interest rates, making it distinct from a fixed-rate mortgage, which has a steady rate for the entire loan term. The other choices do not accurately define an ARM. A fixed-rate mortgage, for instance, has the interest rate locked in for the life of the loan, whereas ARMs are specifically defined by their changing rates. Loans backed by the government refer to specific types of loans that have federal backing, like FHA or VA loans, which again do not pertain to the concept of an ARM. Finally, while some ARMs might be appealing to first-time home buyers, not all ARMs are designed exclusively for this demographic; thus, this choice does not accurately define the mortgage type itself.

An adjustable-rate mortgage (ARM) is characterized by an interest rate that fluctuates periodically, which is why the choice regarding a loan with an interest rate that changes periodically is the correct one. This type of mortgage starts with a fixed interest rate for an initial period, after which the rate adjusts based on changes in a corresponding financial index. This means that the payments may increase or decrease over time, depending on current interest rates, making it distinct from a fixed-rate mortgage, which has a steady rate for the entire loan term.

The other choices do not accurately define an ARM. A fixed-rate mortgage, for instance, has the interest rate locked in for the life of the loan, whereas ARMs are specifically defined by their changing rates. Loans backed by the government refer to specific types of loans that have federal backing, like FHA or VA loans, which again do not pertain to the concept of an ARM. Finally, while some ARMs might be appealing to first-time home buyers, not all ARMs are designed exclusively for this demographic; thus, this choice does not accurately define the mortgage type itself.