Understanding Basic Mortgage Types
Fixed-Rate Mortgages Explained
Q1. What is the key characteristic of a fixed-rate mortgage?
a) Interest rate changes annually
b) Interest rate stays the same throughout the loan term
c) Payment amount varies monthly
d) Term length changes over time
Correct Answer: b) Interest rate stays the same throughout the loan term
Explanation: A fixed-rate mortgage keeps your interest rate constant from day one until your final payment, providing predictable monthly payments.
Adjustable-Rate Mortgages Basics
Q2. An adjustable-rate mortgage (ARM) typically features:
- Initial fixed-rate period
- Rate adjustment intervals
- Rate caps and floors
- Margin and index
Q3. What does a 5/1 ARM mean?
a) 5% down payment, 1-year term
b) 5-year fixed rate, then adjusts every 1 year
c) 5-month review period, 1% maximum increase
d) 5% maximum rate increase, 1-time adjustment
Correct Answer: b) 5-year fixed rate, then adjusts every 1 year
Core Differences Quiz
Q4. Match these features with the correct mortgage type:
| Feature | Fixed-Rate | ARM |
|---|---|---|
| Payment Predictability | High | Low |
| Initial Rates | Higher | Lower |
| Long-term Planning | Easier | Harder |
| Market Risk | None | Yes |
Interest Rate Dynamics
Fixed Rate Stability Test
Q5. Which factors affect your fixed rate? (Select all that apply)
- [ ] Credit score
- [ ] Down payment
- [ ] Loan term
- [ ] Market conditions at lock-in
- [ ] Future market changes
All except “Future market changes” affect your fixed rate.
Adjustable Rate Variations
Q6. Calculate potential ARM payment changes:
- Initial payment at 3.5%: $1,500
- Maximum cap: 2% per adjustment
- Lifetime cap: 5%
- Possible maximum payment: $1,987
Rate Calculation Quiz
Q7. True or False: ARM rates always increase after the fixed period.
- False
Explanation: Rates can go up or down based on market conditions.
Financial Impact Assessment
Monthly Payment Quiz
Q8. For a $300,000 loan, compare monthly payments:
Fixed Rate (4%):
a) $1,432
b) $1,527
c) $1,689
d) $1,834
5/1 ARM (Starting at 3.25%):
a) $1,306
b) $1,389
c) $1,467
d) $1,523
Correct Answers:
Fixed Rate: a) $1,432
ARM: a) $1,306
Long-term Cost Comparison
Q9. Calculate 10-year total interest paid:
Example scenario for $300,000 loan:
- Fixed Rate (4%): $109,833
- ARM (3.25% initial, rising to 5%): $126,947
Risk Assessment Test
Q10. Which mortgage type has higher risk if you plan to:
- Move in 3 years?
a) Fixed-rate
b) ARM
c) Equal risk
Answer: a) Fixed-rate (higher initial rate) - Stay 30 years?
a) Fixed-rate
b) ARM
c) Equal risk
Answer: b) ARM (rate uncertainty)
Choosing Your Mortgage
Lifestyle Considerations
Q11. Match these scenarios with the best mortgage type:
- Military family that moves frequently
- ARM (lower initial rates for short-term stays)
- Settling into forever home
- Fixed-rate (long-term stability)
- Planning to refinance in few years
- ARM (take advantage of lower initial rates)
Financial Goals Quiz
Q12. Which mortgage better suits these goals?
- Lowest possible starting payments
a) Fixed-rate
b) ARM
Answer: b) ARM - Maximum payment certainty
a) Fixed-rate
b) ARM
Answer: a) Fixed-rate
Market Timing Test
Q13. When are ARMs typically more attractive?
a) High interest rate environment
b) Low interest rate environment
c) Stable rate environment
d) Volatile rate environment
Correct Answer: b) Low interest rate environment
Special Scenarios
Refinancing Options
Q14. True or False: You can refinance from an ARM to a fixed-rate mortgage.
- True
Explanation: Many homeowners start with an ARM and refinance to fixed-rate when rates are favorable.
Early Payoff Comparison
Q15. Calculate potential savings with extra payments:
Fixed-Rate Scenario:
- Original term: 30 years
- Extra payment: $200/month
- Years saved: 8
- Interest saved: $63,000
ARM Scenario:
- Varies based on rate adjustments
- Harder to calculate long-term savings
Market Condition Impact
Q16. When might you choose ARM over fixed-rate? (Select all that apply)
- [ ] Interest rates are high and expected to fall
- [ ] You plan to sell before first adjustment
- [ ] You expect your income to increase significantly
- [ ] You can afford worst-case payment scenarios
All of these could be valid reasons to choose an ARM.
Decision Making Tools
Mortgage Comparison Calculator
Q17. What factors should you plug into your comparison?
- Loan amount
- Down payment
- Initial rates
- Potential rate adjustments
- Length of stay in home
Selection Criteria Quiz
Q18. Rank these factors in order of importance (1-5):
- Payment stability
- Initial payment amount
- Long-term costs
- Future plans
- Risk tolerance
Conclusion
Choosing between fixed-rate and adjustable-rate mortgages depends on your personal circumstances, financial goals, and risk tolerance. Use this quiz guide to assess your situation and make an informed decision that aligns with your homeownership plans.
Frequently Asked Questions
- Can I switch from an ARM to a fixed-rate mortgage?
Yes, through refinancing, though you’ll need to qualify and pay closing costs. - Are ARM rates always lower than fixed rates?
Initially yes, but they may exceed fixed rates after adjustments begin. - Do all ARMs have the same adjustment schedule?
No, common options include 3/1, 5/1, 7/1, and 10/1 ARMs, where the first number indicates years before first adjustment. - What happens if I can’t afford ARM payment increases?
Options include refinancing, selling the home, or requesting loan modification if experiencing hardship. - Should I always choose fixed-rate for a long-term home?
Not necessarily. Consider your financial goals, risk tolerance, and market conditions rather than just length of stay.