15 Real Estate Exam Questions on Fixed and Adjustable Rate Mortgages - What is a fixed rate mortgage

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1. What is a defining feature of a fixed-rate mortgage?
a) Interest rate changes annually
b) Monthly payments vary
c) Interest rate remains constant for the life of the loan
d) Payments are interest-only for a set period

Answer: c) Interest rate remains constant for the life of the loan
Explanation: A fixed-rate mortgage has a stable interest rate and monthly payment throughout the loan term.

2. Which type of mortgage adjusts the interest rate periodically based on an index?
a) Fixed-rate mortgage
b) Adjustable-rate mortgage (ARM)
c) Reverse mortgage
d) Jumbo mortgage

Answer: b) Adjustable-rate mortgage (ARM)
Explanation: ARMs have rates that fluctuate based on market index changes, typically after an initial fixed period.

3. A 5/1 ARM means:
a) Fixed rate for 5 years, adjusts yearly after
b) Adjustable rate for 5 years, then fixed for 1 year
c) Interest-only for 5 years
d) Loan is paid off in 5 years

Answer: a) Fixed rate for 5 years, adjusts yearly after
Explanation: In a 5/1 ARM, the interest rate is fixed for 5 years, then adjusts annually thereafter.

4. One advantage of an ARM for borrowers is:
a) High initial interest rate
b) Predictable payments
c) Lower initial interest rate compared to fixed-rate
d) Guaranteed no increase in rate

Answer: c) Lower initial interest rate compared to fixed-rate
Explanation: ARMs usually offer a lower initial rate, making them attractive for short-term homeowners.

5. What is the major risk of an ARM?
a) High closing costs
b) Negative amortization
c) Interest rate increases over time
d) Lower monthly payments

Answer: c) Interest rate increases over time
Explanation: As the market index rises, so can the interest rate and monthly payment on an ARM.