Finance
What is an adjustable-rate mortgage (ARM), and what does the initial fixed period mean?
AA mortgage with a rate that changes monthly from inception; no fixed period
BA mortgage with an interest rate that is fixed for an initial period, then adjusts periodically based on an index plus a margin✓ Correct
CA mortgage available only for commercial properties in Illinois
DA mortgage where the principal balance adjusts based on inflation
Explanation
An adjustable-rate mortgage (ARM) has an interest rate that is fixed for an initial period (e.g., 5/1 ARM: fixed for 5 years, adjusts annually thereafter) and then adjusts periodically based on a market index (such as SOFR) plus a lender margin. ARMs include caps limiting how much the rate can change per adjustment and over the life of the loan. They can be advantageous when rates are high initially or when the buyer plans to sell before the fixed period ends.
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