In an adjustable-rate mortgage, which property does not change year to year?

In an adjustable-rate mortgage, which property does not change year to year?

• A. Remains fixed from year to year
• B. Changes with the index
• C. Changes with the payment
• D. Is determined by the lender each year

Answer: (A)

In an adjustable-rate mortgage, the part of the loan that stays the same year after year is the amount borrowed—the principal fixed at closing. The loan contract sets that amount and it does not change because of rate adjustments. What can change are the interest rate and the monthly payment: the rate is tied to an index and adjusted by a margin, and the payment may change accordingly (subject to caps). The lender doesn’t arbitrarily set a new rate each year; changes are driven by the index value plus the loan’s margin. Keep in mind the balance owed will decline over time as you make payments, even though the original loan amount remains fixed.

In an adjustable-rate mortgage, the part of the loan that stays the same year after year is the amount borrowed—the principal fixed at closing. The loan contract sets that amount and it does not change because of rate adjustments. What can change are the interest rate and the monthly payment: the rate is tied to an index and adjusted by a margin, and the payment may change accordingly (subject to caps). The lender doesn’t arbitrarily set a new rate each year; changes are driven by the index value plus the loan’s margin. Keep in mind the balance owed will decline over time as you make payments, even though the original loan amount remains fixed.