West Virginia Mortgage Law Practice Test 2025 - Free Mortgage Law Practice Questions and Study Guide

An adjustable-rate mortgage (ARM) is characterized by an interest rate that fluctuates based on a corresponding index. This means that the interest rate on the loan is not fixed; instead, it can change at specified intervals, which is usually tied to a specific economic index, such as the LIBOR or the Treasury index. When the index rate changes, so does the interest rate on the mortgage, which can lead to variations in monthly payments over the life of the loan.

The benefit of an ARM is that the initial interest rate is often lower than that of a fixed-rate mortgage, providing borrowers with potentially lower initial payments. However, the borrower must be aware that rates can increase, leading to higher payments down the line. Understanding this feature is crucial for borrowers to adequately budget for potential fluctuations in their monthly mortgage payments.

In contrast, fixed-rate mortgages provide stability in monthly payments, and elements like large down payments or issues related to refinancing do not inherently define an ARM. These other factors pertain to different aspects of mortgage lending but do not accurately characterize what makes an ARM distinct.