Certified Apartment Portfolio Supervisor (CAPS) Practice Exam - Module 2

What characterizes a Variable Rate Mortgage or ARM?

1. The rate can only adjust annually

2. The rate can adjust monthly, quarterly, or annually

3. It requires a fixed rate for the entire term

4. It is always chosen due to higher initial interest rates

The correct answer is: The rate can adjust monthly, quarterly, or annually

A Variable Rate Mortgage, also known as an Adjustable Rate Mortgage (ARM), is characterized by the fact that the interest rate can adjust at various intervals, which can include monthly, quarterly, or annually. This flexibility in adjustment periods is a key feature of ARMs, distinguishing them from fixed-rate mortgages that maintain the same interest rate for the entire loan term. The variable nature allows the lender to periodically reassess the rate based on market conditions or a specific index, which can result in lower initial payments compared to fixed-rate loans. This structure can be attractive to borrowers who anticipate interest rates may decline or who are looking for lower initial payments. It is important to note that options like requiring a fixed rate for the entire term or being chosen specifically due to higher initial interest rates do not align with the fundamental characteristics of ARMs. The essence of an ARM is precisely its variability and potential volatility in interest rates over its life.