Nationwide Mortgage Licensing System (NMLS) Practice Exam

What happens to a mortgage's interest rate during an adjustable-rate mortgage adjustment period?

1. It remains the same

2. It decreases

3. It increases

4. It fluctuates based on the index

The correct answer is: It fluctuates based on the index

In an adjustable-rate mortgage (ARM) adjustment period, the interest rate is tied to a specific index that reflects the cost of borrowing in the market. As the chosen index rises or falls, the interest rate on the mortgage will fluctuate accordingly. This means that during each adjustment period, the lender will adjust the interest rate based on the current level of the index plus a margin, which is a predetermined percentage that the lender adds to the index rate. The key feature of an ARM is that it does not have a fixed rate for the entire loan term. Instead, after an initial fixed-rate period, the rate adjusts periodically. This can lead to increases or decreases in the interest rate, depending on market conditions and the specific index to which the mortgage is linked. Hence, borrowers should anticipate potential changes in their monthly payments as the interest rate may rise or decline based on these market-derived factors. Understanding this mechanism is crucial for borrowers considering an ARM, as it can significantly impact their overall loan costs over time.