Real Estate and Mortgage Terms for Students Practice Test

The main idea here is how the interest rate behaves over the life of the loan. A fixed-rate mortgage carries one interest rate for the entire term of the loan, so the monthly payment stays the same each month. This reliability makes budgeting straightforward because you know exactly what you’ll pay every month, no matter how market rates move.

An adjustable-rate mortgage starts with a lower rate for an initial period, then the rate can change at scheduled intervals (often annually) after that. The new rate is based on a market index plus a fixed margin added by the lender. Since the index moves with the broader market, the payment can go up or down over time. There can be caps on how much the rate or payment can change at each adjustment or over the life of the loan, but the key difference is that the payment isn’t locked in for the entire term.

So the statement that a fixed-rate mortgage has a constant interest rate and payment for the term, while an ARM can adjust at set intervals based on a market index, best captures the fundamental difference.