What does it mean when a mortgage is described as "adjustable-rate"?

What does it mean when a mortgage is described as "adjustable-rate"?

• A. The principal amount remains constant during the loan term
• B. The interest rate fluctuates based on market conditions
• C. The mortgage does not require monthly payments
• D. The borrower can change lenders at any time

Answer: (B)

When a mortgage is described as "adjustable-rate," it means that the interest rate on the loan can fluctuate based on market conditions. This is a key characteristic of adjustable-rate mortgages (ARMs), where the rate is typically fixed for an initial period but will change thereafter at specified intervals. The adjustments are often tied to a specific index, which reflects changes in the broader market, thus resulting in potential increases or decreases in monthly payments depending on interest rate trends. This flexibility can be beneficial for borrowers early in the mortgage term when rates might be lower, but it can also introduce uncertainty and risk if rates rise, leading to higher payments over time. Understanding this feature is crucial for borrowers as it influences their long-term financial planning and budgeting.

When a mortgage is described as "adjustable-rate," it means that the interest rate on the loan can fluctuate based on market conditions. This is a key characteristic of adjustable-rate mortgages (ARMs), where the rate is typically fixed for an initial period but will change thereafter at specified intervals. The adjustments are often tied to a specific index, which reflects changes in the broader market, thus resulting in potential increases or decreases in monthly payments depending on interest rate trends.

This flexibility can be beneficial for borrowers early in the mortgage term when rates might be lower, but it can also introduce uncertainty and risk if rates rise, leading to higher payments over time. Understanding this feature is crucial for borrowers as it influences their long-term financial planning and budgeting.