Adjustable Rate Mortgages (ARMs) and Related Terminology Quiz

ARM stands for Adjustable Rate Mortgage, which offers an interest rate that can change over time.

An adjustable-rate mortgage features a variable interest rate that can fluctuate periodically, usually tied to an index.

The index in an adjustable-rate mortgage is used to determine the interest rate adjustments.

A cap in adjustable-rate mortgages sets a maximum limit on how much the interest rate can increase over time.

The initial fixed period in an Adjustable Rate Mortgage (ARM) is referred to as the Fixed Phase, during which the interest rate remains stable.

A potential risk of adjustable-rate mortgages is that interest rate increases can lead to higher monthly payments, especially after the initial fixed period.

The primary advantage of an adjustable-rate mortgage is its lower initial interest rates compared to fixed-rate mortgages, potentially resulting in lower initial monthly payments.

The margin in an adjustable-rate mortgage represents the lender's profit margin added to the index to determine the interest rate.

A payment cap in adjustable-rate mortgages sets a maximum limit on how much the monthly payment can increase, providing some protection to borrowers.

Negative amortization in an ARM happens when the loan balance increases over time due to payments that are insufficient to cover the accruing interest.

The teaser rate in adjustable-rate mortgages is an initial lower interest rate offered to attract borrowers, typically for a short period before adjusting to a higher rate.

The lifetime cap in adjustable-rate mortgages limits the total increase in the interest rate over the loan term, providing protection to borrowers from excessive rate hikes.