Certified Residential Appraiser Practice Exam

What is an adjusted rate mortgage commonly associated with?

1. A fixed interest rate over the life of the loan

2. A fluctuating interest rate that follows a market index

3. A mortgage with graduated payment terms

4. A loan with interest-only payments

The correct answer is: A fluctuating interest rate that follows a market index

The correct answer is associated with a fluctuating interest rate that follows a market index. An adjustable-rate mortgage (ARM) typically features an initial fixed interest rate for a specified period, after which the interest rate adjusts periodically based on a market index, such as the LIBOR or the Treasury index. This means that the borrower's payments can vary over time, potentially leading to lower initial payments that can increase significantly after the adjustment period based on market fluctuations. With this understanding, the concept of fixed interest rates applies to different types of loans, such as standard fixed-rate mortgages, where the borrower enjoys the predictability of consistent payments throughout the life of the loan. Conversely, graduated payment mortgages do not relate to the adjustable feature; they often have predetermined increases in payments over time. Lastly, loans with interest-only payments allow for only interest to be paid during a certain period, but they do not inherently involve the variable interest rates associated with adjustable-rate mortgages.