What is the difference between a fixed-rate mortgage and an adjustable-rate mortgage?

• A. Fixed-rate stays constant; adjustable-rate changes over time; payments may vary
• B. Fixed-rate changes over time; adjustable-rate remains constant
• C. They are the same
• D. Adjustable-rate always has higher payments

Answer: (A)

The key idea is how the interest rate behaves over the life of the loan. A fixed-rate mortgage keeps the same interest rate for the entire term, so the monthly principal-and-interest payment stays the same (taxes and insurance aside). An adjustable-rate mortgage starts with a fixed period at a low rate, then the rate can adjust at set intervals based on a market index plus a margin, which means monthly payments can rise or fall over time. This is why the statement that the rate stays constant for a fixed-rate loan and changes for an adjustable-rate loan, with payments possibly varying, is correct.

The other descriptions don’t fit: the opposite of the fixed vs. adjustable behavior is claimed in another choice, they aren’t the same loan type, and adjustable-rate loans don’t always result in higher payments—initially they can be lower, and may stay lower if rates don’t rise.