Check your understanding

Check your understanding of key concepts before moving to the “Do it yourself” section.

Indicate whether each statement is True or False.

1. The interest rate adjustment on an ARM will be based on an index specified in the mortgage agreement.

Correct! The interest rate adjustment on an ARM will be based on an index that's specified in your mortgage agreement. For example, the rate may be reset at 3% over the interest rate that the Federal government pays on Treasury Bills.
Sorry, the statement is true. The interest rate adjustment on an ARM will be based on an index specified in your mortgage agreement. For example, the rate may be reset at 3% over the interest rate that the Federal government pays on Treasury Bills.

2. When you’re shopping for mortgages, you’ll see ARMs listed as 1/1, 3/1, 5/1 and so on. The first number indicates how many years the initial fixed rate will last. The second number indicates the maximum interest rate increase permitted in any one year.

Correct! The statement is false. The first number indicates how many years the initial fixed rate will last. The second number tells you how often the interest rate will be adjusted thereafter (almost always a 1 to indicate an annual adjustment).
Sorry, the statement is false. The first number indicates how many years the initial fixed rate will last. The second number tells you how often the interest rate will be adjusted thereafter (almost always a 1 to indicate an annual adjustment).

3. If you choose a 15-year fixed rate loan instead of a 30-year fixed rate loan, you will end up paying more total interest but you will have lower monthly payments.

You are correct! With the longer-term loan, you will actually end up paying more total interest but you will have lower monthly payments.
Sorry, the statement is false. With the longer-term loan, you will actually end up paying more total interest but you will have lower monthly payments

4. You should select the loan with the lowest monthly payment.

You are correct! The statement is false. Your goal is to minimize the amount of interest you pay over a defined period of time, ideally the length of time that you are likely to own the home.
Sorry, that is incorrect. The statement is false. Your goal is to minimize the amount of interest you pay over a defined period of time, ideally the length of time that you are likely to own the home.

Practice what you learned Do it yourself

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