In a 3/1 ARM, what does the "3" represent?

In a 3/1 ARM, what does the "3" represent?

• A. The number of years the rate is fixed
• B. The total loan hours
• C. The number of points on the loan
• D. The payment duration

Answer: (A)

In a 3/1 ARM, the "3" specifically indicates the number of years during which the interest rate remains fixed. This means that for the first three years of the loan term, the borrower will pay the interest at a set rate that will not change. After the initial fixed-rate period, the interest rate will adjust annually based on a specified index and margin, potentially changing the monthly payment for the borrower. The choice specifying the fixed interest rate for the first three years is key because it highlights the structure of adjustable-rate mortgages, which often begin with a stable period before transitioning to potentially fluctuating interest rates. This initial fixed period offers borrowers a period of predictability in their payments before adjustments are made.

In a 3/1 ARM, the "3" specifically indicates the number of years during which the interest rate remains fixed. This means that for the first three years of the loan term, the borrower will pay the interest at a set rate that will not change. After the initial fixed-rate period, the interest rate will adjust annually based on a specified index and margin, potentially changing the monthly payment for the borrower.

The choice specifying the fixed interest rate for the first three years is key because it highlights the structure of adjustable-rate mortgages, which often begin with a stable period before transitioning to potentially fluctuating interest rates. This initial fixed period offers borrowers a period of predictability in their payments before adjustments are made.