Finance
What is an 'adjustable-rate mortgage' (ARM) and what risk does it carry for Rhode Island borrowers?
AA fixed-rate loan where the payment adjusts annually
BA loan with an interest rate that can change periodically based on an index, creating the risk of payment increases✓ Correct
CA government-guaranteed loan with adjustable terms
DA loan that adjusts only when the borrower requests it
Explanation
An ARM has an interest rate tied to an index (such as SOFR) that can change periodically. If rates rise, the borrower's monthly payments increase, posing affordability risk.
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Key Terms to Know
Adjustable-Rate Mortgage (ARM)
A mortgage with an interest rate that changes periodically based on a financial index, usually after an initial fixed-rate period.
Discount PointsPrepaid interest paid to a lender at closing to reduce the mortgage interest rate, with each point equal to 1% of the loan amount.
AmortizationThe gradual repayment of a loan through scheduled periodic payments that cover both principal and interest.
Loan-to-Value Ratio (LTV)The ratio of a mortgage loan amount to the appraised value or purchase price of a property, expressed as a percentage.
Math Concepts
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