An adjustable-rate mortgage (ARM) has:
Question & Answer
Review the question and all answer choices
A fixed interest rate for the entire term
A is incorrect because it describes a fixed-rate mortgage, not an ARM. Fixed-rate mortgages maintain the same interest rate for the entire loan term, while ARMs have rates that adjust periodically based on market conditions.
An interest rate that changes based on an index
No interest charged
C is incorrect because all mortgages charge interest - this is how lenders earn profit. While some special programs might offer temporarily reduced rates, no standard mortgage structure operates without charging interest.
Payment only terms
D is incorrect because ARMs involve both interest and principal components. 'Payment only terms' typically refers to interest-only loans where the borrower pays only the interest for a period before beginning principal payments.
Why is this correct?
B is correct because the defining characteristic of an adjustable-rate mortgage (ARM) is that its interest rate changes periodically based on a specified market index plus a margin. This variability distinguishes ARMs from fixed-rate mortgages where the interest rate remains constant throughout the loan term.
Continue Learning
Explore this topic in different formats
More Real Estate Financing Videos
Continue learning with related video lessons
Ready to Ace Your Real Estate Exam?
Access 2,000+ free video lessons covering all 11 exam topics.