PSI Virginia Real Estate Practice Exam

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Get ready for the PSI Virginia Real Estate Exam. Use multiple choice quizzes with hints and explanations to boost your confidence. Ace your exam!

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How does an adjustable-rate mortgage (ARM) function?

The interest rate remains fixed for the duration of the loan
The interest rate changes according to economic conditions
The interest rate is determined by the borrower's credit score
The interest rate is based solely on the lender's discretion

The correct answer is: The interest rate changes according to economic conditions

An adjustable-rate mortgage (ARM) functions by having an interest rate that fluctuates based on prevailing economic conditions. Typically, the interest rate is linked to a specific financial index, which reflects the overall market interest rates. As these rates change, so does the interest rate on the mortgage, usually after an initial fixed-rate period. This means that borrowers may benefit from lower rates in a declining interest rate environment, but they also face the risk of higher payments if rates rise. The adjustable nature of the interest rate distinguishes ARMs from fixed-rate mortgages, where the rate is constant throughout the loan's life. Additionally, while a borrower's credit score can influence the terms and eligibility for a loan, it does not directly affect how ARMs operate. Furthermore, while lenders do have some discretion regarding loan terms, they cannot arbitrarily set interest rates without considering relevant economic indices used as benchmarks for ARMs.