Final answer:
The portion of an adjustable rate mortgage that can change based on market indices like the COFI or LIBOR is known as the index. Adjustable-rate mortgages provide initial lower rates compared to fixed-rate loans and adjust the rate based on inflation and market conditions. The correct option is A.
Step-by-step explanation:
The portion of an adjustable rate mortgage used to compute the interest rate that can change and is based on factors such as the COFI (Cost of Funds Index), LIBOR (London Interbank Offered Rate), or other benchmarks outlined in the note is known as the index. While the margin is the lender's markup and the adjustment period is the frequency with which the rate adjusts, an ARM is designed with built-in inflation adjustments.
So for example, if the inflation rate goes up, the interest rate on the ARM may rise as well, aligning with the changes in market interest rates. Despite the variability, borrowers often secure lower initial rates with ARMs compared to fixed-rate loans because the lender's risk of reduced real payments due to inflation is mitigated.
Hence, Option A is correct.