What does a 3/1 ARM signify in mortgage terms?

What does a 3/1 ARM signify in mortgage terms?

• A. A 3-year adjustable rate mortgage
• B. A 1-year fixed mortgage
• C. An adjustable rate mortgage that changes every year after 3 years
• D. A 3-year fixed mortgage

Answer: (C)

A 3/1 ARM, or 3-year/1-year adjustable-rate mortgage, indicates that the mortgage has a fixed interest rate for the first three years of the loan. After this initial period, the interest rate will adjust annually based on a specific index or benchmark rate. This structure offers borrowers the benefit of a lower fixed rate for the first three years, making it more affordable during that period. Subsequently, the annual adjustments can lead to changes in the monthly payment as the market fluctuates. In this context, option C accurately defines the adjustable-rate nature of the loan and the specific timeline for changes in rate after the initial fixed period, which is essential for borrowers to understand when considering this type of mortgage product. The other options do not reflect this structure; a 3-year fixed mortgage would remain fixed throughout, and a 1-year fixed mortgage does not relate to the adjustable rate concept after three years.

A 3/1 ARM, or 3-year/1-year adjustable-rate mortgage, indicates that the mortgage has a fixed interest rate for the first three years of the loan. After this initial period, the interest rate will adjust annually based on a specific index or benchmark rate. This structure offers borrowers the benefit of a lower fixed rate for the first three years, making it more affordable during that period. Subsequently, the annual adjustments can lead to changes in the monthly payment as the market fluctuates.

In this context, option C accurately defines the adjustable-rate nature of the loan and the specific timeline for changes in rate after the initial fixed period, which is essential for borrowers to understand when considering this type of mortgage product. The other options do not reflect this structure; a 3-year fixed mortgage would remain fixed throughout, and a 1-year fixed mortgage does not relate to the adjustable rate concept after three years.