Finance
What is an 'adjustable-rate mortgage' (ARM) and what risk does it pose to Hawaii borrowers?
AA. A mortgage with a fixed rate that adjusts for inflation annually
BB. A mortgage where the interest rate can change periodically based on a market index, potentially increasing monthly payments✓ Correct
CC. A mortgage that adjusts the principal balance based on property value changes
DD. A loan where payments adjust based on the borrower's income
Explanation
An ARM has an interest rate that adjusts periodically based on a benchmark index (such as SOFR). While initial rates are often lower than fixed-rate loans, payments can increase significantly if rates rise. This poses payment shock risk, particularly in Hawaii's high-cost market where loan amounts are large.
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