Mortgage Loan Originator (MLO) Licensing Practice Test

An adjustable-rate mortgage (ARM) is characterized by periodic adjustments to the interest rate, which typically coincide with changes in a benchmark interest rate or index. This means that after an initial fixed-rate period, the interest rate can rise or fall at specified intervals, affecting the monthly payment amount for the borrower.

This structure can lead to lower initial payments compared to fixed-rate mortgages but carries the risk that payments may increase significantly over time if market interest rates rise. The periodic adjustments are a key feature of ARMs, making it important for borrowers to understand how these changes can impact their long-term financial commitment.

In contrast, other options do not accurately represent the nature of an ARM. A fixed interest rate for life describes a fixed-rate mortgage rather than an adjustable-rate mortgage. Balloon payments characterize a different mortgage structure, and an unsecured loan refers to a loan type that is not secured by collateral, which is unrelated to the features of an ARM.