Maryland Home Improvement PSI Practice Exam

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Prepare for the Maryland Home Improvement Test. Study using flashcards and multiple-choice questions, each with hints and explanations. Get ready to excel on your exam!

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When a home is purchased using an adjustable-rate mortgage (ARM), the monthly loan payment will ____________?

Rise slightly in each adjustment period until the cap is reached.
Be adjusted automatically to ensure that negative amortization does not occur.
Be based on a very low interest rate to begin with, but will rise to the market rate at the first adjustment.
Vary over the life of the loan depending on fluctuations in the interest rate to which the loan is referenced.

The correct answer is: Vary over the life of the loan depending on fluctuations in the interest rate to which the loan is referenced.

The monthly loan payment on an adjustable-rate mortgage (ARM) will vary over the life of the loan depending on fluctuations in the interest rate to which the loan is referenced. An ARM typically starts with a lower initial interest rate compared to a fixed-rate mortgage, but after an initial fixed period, the interest rate adjusts periodically based on a specific index or benchmark rate, which is subject to market conditions. As interest rates rise or fall in the market, the monthly payment adjusts to reflect those changes. This means that the borrower may see their payments increase if interest rates go up or decrease if interest rates go down, leading to variability in payment amounts throughout the life of the loan. Understanding this aspect is crucial, as it can significantly affect long-term budgeting and financial planning for homeowners with ARMs.