Loan Signing and Real Estate Practice Test 2025 – Comprehensive Exam Prep

Question: 1 / 400

An adjustable-rate mortgage (ARM) typically has what kind of interest structure?

The interest rate is fixed for the entire period

The interest rate changes after an initial fixed period

An adjustable-rate mortgage (ARM) is characterized by an interest rate that changes after an initial fixed period. This structure typically starts with a predetermined period during which the interest rate remains constant—this could range from a few months to several years. After this initial period, the rate adjusts periodically based on a specific index or benchmark rate plus a margin set by the lender.

This feature allows borrowers to potentially benefit from lower initial rates compared to fixed-rate mortgages, but it also introduces the risk of the interest rate increasing, which can lead to higher monthly payments in the future. Understanding this dynamic is crucial for borrowers considering an ARM, as it impacts their long-term financial planning and monthly budgeting.

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The interest rate is determined based on the market fluctuations

The interest rate is always lower than fixed-rate loans

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