Final answer:
An (C) adjustable-rate mortgage (ARM) is a loan that has an interest rate that changes in response to movements in a specific market-determined interest rate. It provides flexibility for borrowers but also exposes them to interest rate risk.
Step-by-step explanation:
An adjustable-rate mortgage (ARM) is a loan that a borrower uses to purchase a home in which the interest rate varies with market interest rates. This means that if there is a change in a specific market-determined interest rate, the interest owed on the mortgage will also change. Unlike a fixed-rate mortgage, where the interest rate remains constant throughout the life of the loan, an adjustable-rate mortgage provides flexibility in response to market conditions.
For example, let's say you have an adjustable-rate mortgage with an initial interest rate of 3%. If the market interest rates increase by 1%, your mortgage interest rate will also increase to 4%. On the other hand, if the market interest rates decrease by 1%, your mortgage interest rate will decrease to 2%.
Overall, an adjustable-rate mortgage allows borrowers to take advantage of potential interest rate decreases, but also exposes them to the risk of interest rate increases.