Which mortgage type features an interest rate that periodically changes based on an index?

Which mortgage type features an interest rate that periodically changes based on an index?

• A. Fixed-Rate Mortgage
• B. Balloon Mortgage
• C. Adjustable-Rate Mortgage
• D. Reverse Mortgage

Answer: (C)

The type of mortgage that features an interest rate that periodically changes based on an index is the adjustable-rate mortgage (ARM). This financial product begins with an initial interest rate that is often lower than that of fixed-rate mortgages, and after a defined period, the rate adjusts according to a specific index plus a margin set by the lender. The adjustments typically occur at predetermined intervals, such as annually, and are influenced by market conditions, which can lead to fluctuations in monthly payments over the life of the loan. This mortgage structure allows borrowers to benefit from potentially lower interest rates at the start of the loan term, but it also exposes them to the risk of increased payments if interest rates rise in the future. Understanding this characteristic is crucial for prospective homebuyers, especially those who plan to stay in their homes only for a short period since ARMs often entail lower initial payments than fixed-rate mortgages.

The type of mortgage that features an interest rate that periodically changes based on an index is the adjustable-rate mortgage (ARM). This financial product begins with an initial interest rate that is often lower than that of fixed-rate mortgages, and after a defined period, the rate adjusts according to a specific index plus a margin set by the lender. The adjustments typically occur at predetermined intervals, such as annually, and are influenced by market conditions, which can lead to fluctuations in monthly payments over the life of the loan.

This mortgage structure allows borrowers to benefit from potentially lower interest rates at the start of the loan term, but it also exposes them to the risk of increased payments if interest rates rise in the future. Understanding this characteristic is crucial for prospective homebuyers, especially those who plan to stay in their homes only for a short period since ARMs often entail lower initial payments than fixed-rate mortgages.