How do adjustable-rate mortgage (ARM) interest rate adjustments work?

• A. The index is always LIBOR.
• B. The rate can change at each adjustment date based on the index plus the margin.
• C. The rate is fixed for the life of the loan.
• D. The payment never changes.

Answer: (B)

Adjustable-rate mortgage adjustments happen when the lender sets a new rate at each adjustment date by adding a fixed margin to a fluctuating index. The index tracks current market rates, and the margin is a constant percentage the lender applies for the life of the loan. When an adjustment occurs, the new rate equals index plus margin, and the monthly payment typically changes to reflect that new rate and the remaining loan term. There can be caps that limit how much the rate or payment can rise (or fall) at each adjustment, but the core idea is that the rate moves with the chosen index and a fixed margin. Indices can vary (SOFR, LIBOR, etc.), and LIBOR is not used exclusively or permanently in newer ARMs. The rate is not fixed for the life of the loan, and the payment can change at adjustment dates, rather than staying the same.