Question

what is a characteristic of an adjustable-rate mortgage (arm)?
the interest rate decreases each year, regardless of market conditions.
the interest rate stays constant for the entire loan term.
the mortgage is only available for short-term loans.
the interest rate can vary based on an index, typically after a set initial period.

Explanation:

To determine the characteristic of an adjustable - rate mortgage (ARM), we analyze each option:

• The first option is incorrect because an ARM's interest rate is not guaranteed to decrease each year; it depends on market - related indices.
• The second option is incorrect as a fixed - rate mortgage has a constant interest rate for the entire loan term, not an ARM.
• The third option is incorrect as ARMs are not limited to short - term loans; they can have various term lengths.
• The fourth option is correct. An ARM has an initial fixed - rate period, and after that, the interest rate can adjust based on a specific index (like the prime rate or LIBOR), which reflects market conditions.

Answer:

The interest rate can vary based on an index, typically after a set initial period.