How does an adjustable-rate mortgage (ARM) differ from a fixed-rate mortgage?

How does an adjustable-rate mortgage (ARM) differ from a fixed-rate mortgage?

• A. ARMs have lower initial payments
• B. ARMs have changing interest rates
• C. ARMs require no collateral
• D. ARMs are solely for investment properties

Answer: (B)

An adjustable-rate mortgage (ARM) is characterized by having interest rates that can change over time, typically in relation to a specific index. This contrast with a fixed-rate mortgage, where the interest rate remains constant throughout the life of the loan, provides different financial implications for borrowers. ARMs often start with a lower initial interest rate, which can result in lower initial payments compared to fixed-rate mortgages. However, after a predetermined period, the interest rate on an ARM adjusts periodically, which can lead to fluctuations in monthly payments based on the performance of the index to which the interest rate is tied. The concept of changing interest rates is central to how ARMs function and significantly affects a borrower's long-term financial planning. While other options contain elements of truth, they do not capture the essential distinguishing characteristic of ARMs: the variability of the interest rate over the life of the mortgage. Thus, option B aptly highlights a fundamental feature that separates ARMs from fixed-rate mortgages, making it the correct choice in understanding their differences.

An adjustable-rate mortgage (ARM) is characterized by having interest rates that can change over time, typically in relation to a specific index. This contrast with a fixed-rate mortgage, where the interest rate remains constant throughout the life of the loan, provides different financial implications for borrowers. ARMs often start with a lower initial interest rate, which can result in lower initial payments compared to fixed-rate mortgages. However, after a predetermined period, the interest rate on an ARM adjusts periodically, which can lead to fluctuations in monthly payments based on the performance of the index to which the interest rate is tied.

The concept of changing interest rates is central to how ARMs function and significantly affects a borrower's long-term financial planning. While other options contain elements of truth, they do not capture the essential distinguishing characteristic of ARMs: the variability of the interest rate over the life of the mortgage. Thus, option B aptly highlights a fundamental feature that separates ARMs from fixed-rate mortgages, making it the correct choice in understanding their differences.