PSI Virginia Real Estate Practice Exam

How does a fixed-rate mortgage differ from an adjustable-rate mortgage?

1. The fixed-rate mortgage has a fluctuating interest rate

2. The fixed-rate mortgage has a stable interest rate throughout the term

3. The fixed-rate mortgage is more expensive than an ARM

4. The fixed-rate mortgage does not require any down payment

The correct answer is: The fixed-rate mortgage has a stable interest rate throughout the term

A fixed-rate mortgage is characterized by its stable interest rate, which remains constant throughout the entire term of the loan. This stability provides borrowers with predictability in their monthly mortgage payments, allowing them to budget more effectively over time. In contrast, an adjustable-rate mortgage (ARM) features an interest rate that can change after an initial fixed period, which can lead to lower initial payments but also introduces uncertainty regarding future payments. By maintaining a consistent rate, a fixed-rate mortgage protects the homeowner from fluctuations in the market interest rates, giving them peace of mind and financial stability. This is particularly advantageous in rising interest rate environments, where the cost of borrowing could increase significantly for borrowers with an ARM after the initial fixed period ends. The other options do not accurately represent the fundamental qualities of a fixed-rate mortgage, as they either confuse its characteristics or address aspects that pertain more to mortgage requirements or costs without focusing on the key difference in rate stability.