Finance
A mortgage in which the interest rate is fixed for the first 5 years and then adjusts annually is called a:
AGraduated payment mortgage
B5/1 adjustable-rate mortgage (ARM)✓ Correct
CBalloon mortgage
DReverse mortgage
Explanation
A 5/1 ARM has a fixed interest rate for the initial 5-year period, after which the rate adjusts annually based on an index plus a margin. The first number indicates the fixed period; the second indicates adjustment frequency.
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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.
Private Mortgage Insurance (PMI)Insurance required by lenders on conventional loans with less than 20% down payment, protecting the lender — not the borrower — against default.
AmortizationThe gradual repayment of a loan through scheduled periodic payments that cover both principal and interest.
Math Concepts
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