Final answer:
Lenders must advise borrowers when the interest rate on an adjustable-rate mortgage (ARM) changes. ARMs have variable interest rates that can lead to fluctuating monthly payments, often starting with lower rates than fixed-rate loans. Communication between lenders and borrowers is key to ensure understanding of potential payment changes over the loan's term.
Step-by-step explanation:
When the interest rate on an adjustable-rate mortgage (ARM) changes, the lender is typically required to advise the borrower. This communication ensures borrowers are aware of any adjustments that might affect their monthly mortgage payments. An ARM offers an interest rate that varies with the market interest rates or rate of inflation, which can lead to changes in the repayment amount over the life of the loan. Borrowers often receive a lower initial interest rate with an ARM compared to a fixed-rate loan, as ARMs transfer the risk of rising inflation from the lender to the borrower, allowing for a lower initial risk premium.
However, if market rates increase due to inflation, the borrower's interest rate and monthly payment could rise accordingly. It is crucial for borrowers to understand that the potential for rising payments exists when considering an ARM versus a fixed-rate mortgage. The variability inherent in ARMs can sometimes lead to unexpected payment increases, which should be clearly communicated by lenders to borrowers throughout the duration of the mortgage agreement.