Personal Finance Module 3 DBA Practice Test

The correct answer identifies two widely recognized types of mortgages: fixed rate mortgage and adjustable rate mortgage (ARM).

A fixed rate mortgage has an interest rate that remains constant throughout the life of the loan, providing predictable monthly payments and stability for borrowers who prefer consistency in their budget. This type of mortgage is particularly beneficial for individuals who plan to stay in their home for a long time, as it protects them from fluctuations in interest rates.

On the other hand, an adjustable rate mortgage (ARM) has an interest rate that may change periodically based on movements in a specific index. This type of mortgage generally starts with a lower initial interest rate, which can be appealing for buyers looking to manage cash flow in the short term. However, the payments can increase over time, depending on market conditions, which requires borrowers to be more mindful of potential future rate changes.

Understanding these two types of mortgages helps borrowers make informed decisions based on their financial circumstances and long-term plans.