Hawaii Pre-Licensing National Practice Exam

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Prepare for the Hawaii Pre-Licensing National Exam. Study with flashcards and multiple choice questions, each question provides hints and explanations. Get ready for success!

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What type of mortgage allows for fluctuations in interest rates during its term?

Fixed-rate mortgage
Balloon mortgage
Adjustable-rate mortgage
Reverse mortgage

The correct answer is: Adjustable-rate mortgage

An adjustable-rate mortgage (ARM) is designed to accommodate fluctuations in interest rates throughout its term. Unlike a fixed-rate mortgage, where the interest rate remains constant for the entire loan period, an ARM features an interest rate that can change at specific intervals. This adjustment is typically tied to a financial index, which reflects broader market conditions, resulting in the potential for the borrower's monthly payment to vary over time based on rising or falling interest rates. This type of mortgage can be advantageous for borrowers who are comfortable with potential changes in payment amounts, especially if they anticipate that interest rates will decrease or remain stable. However, it also carries the risk of increased payments if rates rise. Therefore, understanding the structure of an adjustable-rate mortgage helps borrowers make more informed decisions when selecting a mortgage product that aligns with their financial goals and risk tolerance.